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Salt Lake City Bookkeeping Blog

Cash Flow: The Secret Small Business Killer

Posted by Matt Roberge on May 10, 2016 8:30:00 AM

Cash Flow and Outsourced BookkeepingProperly managing your small business cash flow is critical if you want to succeed. Even if you are just a startup with no revenues, but you have raised money, cash flow is still incredibly important.

According to Dun & Bradstreet:

"90% of small business failures are caused by poor cash flow. Put simply, not enough cash coming in the door and too much going out."

I consider myself a real master of monitoring and controlling the cash flow for our small business. Below, I will give you some practical advice on how to properly manage small business cash flow.

Invoicing and Collections

Send invoices right away. It is important that you get cash coming into your business as quickly as possible. When you confirm a sale, email an invoice out right away that your customer can pay.

Make it easy for your customers to pay. You need to have a good invoicing method that makes it easy for your customers to pay as soon as they receive the invoice. I personally use QuickBooks payments for our processing needs solely based on the fact that it syncs payments and fees into QuickBooks. The amount of money you will save shopping for a better rate will be eaten up by your wasted time recording the payments into your accounting system.

Accept credit cards. So many businesses hold out on accepting credit cards because they feel the merchant rates are too high. The time you will spend waiting for a check to arrive in the mail is a cash flow killer. Do yourself a favor and take whatever you were going to charge and increase it by 3%. If you are good at what you do, nobody will care. I highly recommend that you only accept credit cards.

Set up recurring automatic payments. If I pay a vendor the same amount every month for a service and they take a credit card, I sign up 100% of the time

Create payment terms, enforce them, and follow up on outstanding invoices (pretty self-explanatory). 

Only offer discounts as a last resort. I'm not talking about factoring your accounts receivable, as that is rarely a good decision. If you really need cash badly, offer a small discount like 3%-5% if the invoice is paid today. If you feel you are not going to collect and a discount might change that, then some money is better than no money.

Don't Make Bad Decisions With the Cash You Do Have

I know what you are thinking: For some people, this is easier said than done (especially in America, right?). But seriously, I have heard of some stupid stuff in my career as a bookkeeper.

I once heard of a business that was offered a 10% discount on their office rent if they prepaid for six months. So they jumped at the opportunity, and guess what happened? They didn't have enough money to make their next payroll. 

Another simple rule to follow is to hold off on paying your bills until as late as possible. While this seems like common sense, most business owners don't follow this advice... believe me. 

Keep Solid Records

Another way to boost cash flow is to track it closely. I use QuickBooks to manage cash flow for our small business. If you want to really get a handle on cash flow here are some easy steps to follow:

1. Always sort your bank account by cleared status.

2. Make sure accounts receivable (invoices to customers) and accounts payable (bills from vendors) are always up to date. Services like QuickBooks payments and Bill.com make this a breeze. 

3. Any fixed, recurring payments that hit your bank account automatically should be entered into QuickBooks in advance through recurring transactions.

4. Estimate the cost of any large variable expenses that you expect to hit your bank account as they get closer. A good example of a large variable expense is payroll. 

Forecast Future Cash Flow

When you follow all of the steps above, you should get a pretty good handle on cash flow. Looking at your bank accounts sorted by cleared status will allow you to see not only how much cash you have (today's online bank balance), but also where your cash balances are heading based on the expenses that you know are coming (what I refer to as actual cash balance in the formula below).

You can then take it a step further and see what your potential cash flow is. I like to use the following formula:

Actual cash balance + AR - AP = Potential cash overage or shortage.

When you analyze your cash flow at this level of detail, you will spot cash flow problems before they are a real problem. If you are short, you can then attempt to discount an invoice or pull on a line of credit.

The last step, which I highly recommend, is to do a forecast at the end of every single month. I like to forecast out 2-3 months into the future.

Creating a financial forecast is important even for the small business owner as it helps you to spot potential cash flow problems early. If you can see a cash flow shortage coming, you can make the necessary pivots ahead of time rather than being blindsided by the problem.

Is your small business having cash flow problems?

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Topics: Cash Flow Management, Accounts Receivable, cash flow forecasting, Financial Forecasting, Cash Flow