Most businesses experience ups and downs throughout the year. Sometimes it is expected. For example, an accounting firm experiences a very heavy workload during tax season. For other industries, it may not be as easy to predict these ups and downs, so managing cash flow can be a challenge.
Cash flow refers to the movement of funds in and out of your business. Positive cash flow occurs when the amount of money you are taking in is more than the cash leaving your business through payroll, expenses, etc. Negative cash flow occurs when you are spending more than you are receiving.
However, simply making a profit doesn’t mean that your cash flow is being managed properly. Effective cash flow management means focusing on the main drivers of both positive and negative cash flow.
The small business accounting experts at Carson Thorn, CPA put together these six tips for small businesses on managing cash flow throughout the year.
The key to managing cash flow is to understand your peak season. Reviewing your finances from the previous year will show you when you had the most sales and also reveal when your business was struggling the most. Plan your cash flow based on the previous year so you can plan for the slow times.
Variable expenses include inventory, equipment, and possibly payroll, if you employ temporary workers or contractors. For managing inventory, look to your previous year and order accordingly. There’s no need to order more than you need! Equipment can be difficult to predict. A forklift may break and become unusable unexpectedly.
Be aware of your cash flow.
If the unexpected happens during a time of slow cash flow, you may need to opt for repairs instead of purchasing new equipment. If you suspect the repair is a temporary fix, make it a part of your budget for the next fiscal year.
Establishing a line of credit for your business can serve as a life line during times of negative cash flow. Credit should be established with lenders and vendors in advance of a cash flow crisis, though. Banks or vendors may be hesitant to lend to a business in a desperate situation. Banks may not give you the best rate and a vendor may freeze you out completely.
Establish that line of credit when business is booming and establish trusting relationships so that they will be there for you when and if you need them.
Always keep your cash balances in interest-earning accounts. CDs and Money Market accounts are often the best options for earning interest. Ask your bank about your options and then determine the best course of action with your small business accountant. Many interest-earning accounts require a minimum balance, so you should keep this in mind when establishing these types of accounts.
The manner in which you can maximize cash inflows largely depends on your industry. If you provide a service or sell a custom product, you can maximize cash inflows by requiring a deposit. For subscription-based services, requiring payment up front can also help maximize your cash inflow.
There are many ways to control your business expenses, including buying used equipment, making repairs instead of upgrades, and working with your vendors. If you establish a good working relationship with a vendor, you may be able to barter services or get a discount, particularly if you can guarantee consistent business.
While managing cash flow is important, hiring a small business accountant is essential. Even if you are financially savvy, an experienced accountant ensures that your business finances are in order and can help you ensure positive cash flow throughout the year.