Smoothing Out Your Business’s Cash Flow
Of all the important measurable metrics, a business can live and die on cash flow as readily as any other. If you don’t have enough liquid capital on hand, you could struggle to pay your bills and your employees on time, which can damage your credit and credibility. But if you are proactive about keeping cash flowing smoothly through your business, you can look forward to things running like a well-oiled machine.
Set cash aside for emergencies
Even when you are thorough about managing cash flow and consider all the angles, the unexpected can strike. To prevent being taken off your feet and left scrambling, U.S. Chamber of Commerce contributor Miranda Fraraccio recommends having cash on hand. Having a cash reserve of about three to six months’ worth of operating expenses will ensure that there’s consistent cash flow even in such extreme events as natural disasters or other crises.
Of course, Fraraccio notes that this is only practical if you have the money upfront to set aside. One way you could go about building an emergency fund would be to gradually make deposits into a high-yield business savings account, allowing your money to accumulate interest over time.
Learn how cash flows in and out of your business
Running a business can be unpredictable, but more often than not, you’ll be able to pick up on patterns as far as how cash flows through. A great way to manage cash flow is to start recognizing these patterns and trying to take advantage of them. Author and accountant Philip Campbell tells NerdWallet contributor Teddy Nykiel that you should always be reasonably able to answer the questions of what happened to your business’s cash last month and what will happen to your cash in the month ahead.
You can derive the answer to these questions based on the timing of things like acquiring inventory, moving that inventory, paying bills, and receiving payments. In some cases, you may be able to set the tempo yourself — Investopedia contributor Dan Moskowitz recommends getting into the habit of invoicing as soon as possible, which can give you a better idea of when you can consistently expect payments from customers.
To make the most of this, The Hartford recommends making a cash flow forecast that projects inflows and outflows of cash throughout the month based on historical data. You will want to adjust this forecast over time to account for changes in patterns and habits, and over time, you should even be able to pick up on irregularities that may occur during slow and busy seasons.
Keep track of your inventory
Will Katz, the director of the University of Kansas’ Small Business Development Center, tells Nykiel that inventory is more or less as good as cash — but only as long as you’re moving it. If you overload on inventory and wind up with more than you need, it risks consistent cash flow and leaves you idling when you could be progressing.
The key to maximizing inventory and freeing up cash flow, Nykiel writes, is figuring out how to purchase inventory in spurts that won’t leave you overburdened or understocked. To get the hang of this, you’ll need to be diligent about watching how your inventory moves and ready to move when inventory starts getting short. This can also be difficult to predict in the short term due to changing consumer patterns, but over time, you’ll create a rhythm that allows you to maximize cash flow and not come up short on critical inventory.
As a growing business, keeping track of your money is critical for success. While you continue to grow, consider trusting the work of cash flow management to a financial manager or accountant, who can employ strategies that will set you up for long-term success.