Simply put, cash flow management is managing all funds that go into and out of a business. However, when you dig deeper, cash flow management is a complex topic that a lot of small business owners struggle with.
According to a recent study published by Capital One, managing cash flow is a top concern among small business owners. Take a look at the true importance of small business cash flow and how to improve it while also optimizing operational efficiency.
The Importance of Cash Flow Management in Small Business
Improperly managed cash flow can be the detriment of a small business. When funds are mismanaged, you can face a long list of problems, such as:
- Difficulties meeting the demands of payroll
- Problems maintaining investor relations
- Inability to fund necessary operational expenses
- Difficulties with account reconciliations
- Problems with tax compliance
4 Tips for Cash Flow Improvement
A good cash flow management plan prevents funding shortfalls and helps you to avoid potential problems. Here are a few good tips for implementing in your operation.
1. Build a Streamlined Billing Strategy
Streamlined billing can be one of the most rudimentary components of a cash flow strategy. Essentially, if billing is not properly handled, you miss opportunities for stable and predictable revenue. Therefore, do what is necessary to ensure invoices are sent in a timely way, and those invoices are as straightforward for clients to reconcile as possible.
Create a billing policy that outlines things like:
- When invoices will be sent
- How many days a client has to pay the invoice
- What happens when a payment is late
As a side note, using a service like Invoice Home ensures the invoices you send are recognizable, clear-cut, and easy for recipients to pay.
2. Align Expense Payments with Revenue
All small businesses have their own revolving expenses, such as payroll, building lease costs, inventory or supply costs, and more. Shingle the larger payouts to better align with business revenue. For example, you may need to adjust your payroll to a bi-weekly cycle if your business generally makes the bulk of its revenue during the first and last part of the month.
3. Keep Receivable Turnover Times in Check
Always keep tabs on how long it takes for receivables to come in. When your business is owed money, you want the wait time for that money to be as little as possible. If you see that it is taking longer for your business to get payments when bills are owed, this is usually a sign that invoicing or collections processes need tweaking. This could be something as simple as a lack of payment options on your invoices or something as intrinsic as a lacking collections protocol.
4. Utilize Available Lines of Credit Only When Necessary
If you have access to lines of credit, those can be used responsibly to aid cash flow management but should never be used as a long-term crutch. For example, a working capital loan can be a better option when you have to invest in new equipment than using all available business funds and leaving your business accounts drained.
Optimize Cash Flow with the Tools Your Business Needs
Small businesses with the most optimized cash flow processes are more likely to experience success and stability over the long term. Sometimes, the smallest tools can make a huge difference. Professional invoice templates are a good example. Be sure to check out Invoice Home for help with creating customized invoices.
