How to Manage Business Cash Flow

Every business requires cash. Regardless of the amount of revenue generated, if cash is tied up in unsold inventory or receivables, it becomes nonfunctional. Maintaining a healthy cash flow in your business provides the ability to meet financial obligations and the flexibility to capitalize on new opportunities. Having sufficient cash on hand allows you to pay bills, accept new projects, or launch marketing campaigns.

Cash flow refers to the money entering and leaving your business, as documented in a cash-flow statement. Positive cash flow indicates that more money is coming in – typically from sales or borrowed funds – than going out to cover expenses like payroll, inventory, and rent.

However, sustaining positive business cash flow can be challenging, as many entrepreneurs find, according to research by the Federal Reserve Banks of New York, Atlanta, Cleveland, and Philadelphia. In certain circumstances, a cash-flow loan might resolve a cash crisis, but it is not always the solution.

Below are five strategies outlined for managing business cash flow.

advertisement

1. Understand your cash-flow cycle

A cash-flow cycle represents the time taken to buy raw materials, manufacture products, sell them, and receive payment. Philip Campbell, a certified public accountant and author of "Never Run Out of Cash," suggests being able to answer two key questions at any time:

• What happened to your business's cash last month?

• What’s about to happen to your business’s cash?

By keeping your business's balance sheet and profit and loss statements updated and reviewing them regularly, you can find the answers. Understanding your cash-flow cycle enables you to address any inconsistencies, like delaying payments to suppliers or collecting payments sooner.

2. Encourage prompt customer payments

On average, debtors pay two weeks late, as per accounting platform Xero. Rather than waiting for customer payments, Campbell advises taking proactive steps to ensure timely payments.

Establish a system to remind customers to pay on time, such as setting up automated emails to remind them 10, seven, and two days before payment is due. If a payment is overdue, consider sending a personalized reminder or making a phone call.

3. Optimize inventory turnover

From a small-business perspective, inventory is akin to cash, notes Will Katz, director of the Small Business Development Center at the University of Kansas. To maximize available cash, aim to turn over inventory swiftly.

For instance, if a shoe store spends $500,000 annually on shoes and makes two $250,000 purchases, cash will be tied up until the shoes sell. Increasing inventory turns to five per year would free up more cash by reducing the amount tied up in inventory at any given time.

4. Explore invoice financing

If negotiation isn't feasible or you need cash sooner, consider invoice financing, also known as accounts receivable financing.

Distinct from invoice factoring, where invoices are bought at a discount, invoice financing companies advance the total or part of outstanding invoices, to be repaid with interest upon invoice receipt. Annual percentage rates for invoice financing typically range from about 11% plus the prime rate to 64%.

5. Evaluate cash-flow loans

If you lack outstanding accounts receivable but need additional financing for cash flow, consider cash-flow loans. These short-term, often high-interest loans or credit lines are available from online lenders. Reserve cash-flow loans for investments that will boost revenue, like marketing campaigns or new equipment, rather than routine expenses such as rent and payroll.

Prior to applying for a cash-flow loan, working capital loan, or any small-business loan, compare options based on terms, APR, and eligibility.