Running a business means you are in charge of every aspect of the business. Your responsibility to your business financial health is what keeps you afloat to service your clients needs. In order to achieve a healthy financial perspective, it is important to know where your cash lies within your business.
Why cash flow analysis is important
A CNBC show called The Profit, did a spotlight on a company that had this exact problem.
Key West Key Lime Pie Company
Established: 10 years ago for $1,200
Revenue: 1.4 million in sales with 80-90% margins
Problem: A low cash flow position from a second location used for distribution side of the business.
Entrepeneurs. About.Money tells us, in Cash (Flow) Really Is King, that we need to differentiate between profitability and cash flow:
"Profit is the difference between income and expenses. Income is calculated at the time the sale is booked, rather than when full payment is received. Likewise, expenses are calculated at the time the purchase is made, rather than when you pay the bill."
"Cash flow is the difference between inflows (actual incoming cash) and outflows (actual outgoing cash). Income is not counted until payment is received and expenses are not calculated until payment is made. Cash flow also includes infusions of working capital from investors or debt financing.”
Our 10 Recommendations To Improve Your Cash Flow
Cash flow is the movement of money into and out of your business. Your company can experience booming sales and growth, but without positive cash flow you won’t be able to pay your employees and vendors and you will soon find yourself in a difficult spot. Below is a list of best practices to maximize your cash flow.
- Invoice immediately
- Set your payment terms to 30 days or less
- Offer a discount to customers who pay early (2 – 3%)
- Consider asking for deposits for larger projects
- Monitor receivables balances on a regular basis
- Research your customer’s credit worthiness, ask for references for new customers
- Call customers who are past due
- Use your business credit card to pay vendors
- Put services you need up for bid to get the best price
- Get a bank line of credit to fill in short-term cash gaps
Make sure your bookkeeping is tidy and that your financials make sense. We offered a few ways to improve your cash flow position. Being a business owner means you are busy - getting help is easier than you think. If you feel you are in jeopardy of fixing unresolved items in your books our consultation process is simple and transparent. Learn more about our small business accounting solutions.