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Understanding and Managing Business Cash Flow

To run a successful business, you must relentlessly monitor and maintain your cash flow. Great employees, effective marketing, and a solid IT infrastructure drive prosperous and healthy companies’ reputations and brand recognition in the market; but ask any successful business owner what their chief concerns are, and they will likely give you a list that includes maintaining the day-to-day cash flow that allows them to manage payments and receivables, reinvest in the business, and protect hard-earned profits.

Cash flow refers to the movement of money in and out of a small business and is essential for managing expenses and sustaining operations. Carefully monitoring the cash flow of your business provides valuable insights into how it’s performing, particularly when monitoring continues for an extended period. For example, monitoring cash flow may clue you in on where to make spending adjustments and reduce expenses. Cash flow is also an important component in making important decisions that can impact planning and growth, such as hiring additional staff, purchasing equipment, or securing a loan and repaying it in a timely manner.

Tips for Managing Cash Flow

1. Choose the Right Tracking Tool

Banks, accountants, and bookkeepers recommend against using spreadsheets as a means of keeping track of cash flow, as this kind of tool does not have the necessary measures to capture all the required receipt and payable information, is very limited in its ability to sync up with other documents and reports, is subject to human error, and most significantly, lacks security and authentication measures.

Instead, such professionals recommend treasury management solutions in the form of cloud-based software systems. These platforms are designed to support and provide all the capabilities listed above so that reviews of cash flow are accessible and consistent.

Keep in mind that the most popular or most heavily advertised cloud-based software may not suit the treasury management needs of your business. You should make an informed decision based on a careful study of your company’s existing data needs and accommodating its potential growth, as well as its ability to migrate into another program if you outgrow your existing system or undergo an acquisition or merger.

2. Consider Leasing Vs. Buying

On paper, leasing supplies, equipment, and real estate tends to be more expensive than buying, so this tip may seem counterintuitive. However, leasing allows business owners to pay for large expenses gradually and in small increments, which helps improve cash flow. Additionally, lease payments are a business expense, and so you may be able to write them off your taxes. Consult with a tax professional to understand your unique situation.

3. Negotiate Early Payment Discounts with Customers and Vendors

Depending on the type of products or services you offer and a customer’s credit score or payment history, you may choose to offer discounts for early payments. Consider running a credit check or only offering an early payment discount to long-term customers to give you confidence that payments will come on time. The sooner cash comes in for goods or services, the sooner it’s available for reinvesting back into the business.

Cash flow can also be managed by negotiating your own early payment discounts for goods and services you procure from vendors. Pay close attention to the discount being offered for early payments, and keep in mind the opportunity cost of paying early and not having that cash immediately available for other purposes.

4. Automate Your Invoices or Send Them Out Immediately

Ideally, your invoices will be generated and sent automatically. Automating invoices saves you valuable time and makes it easier to accept multiple payment types from your customers, such as credit card, Zelle, and automated clearing house (ACH) transfers. Couple your automated invoice software with a robust business online banking platform and see your balance and transactions in real time, receive alerts when credits and debits hit your accounts, and keep tabs on payments going out.

If automating invoice collection isn’t an option, learn how to put together a good invoice and send it out immediately after providing a product or service. A good invoice should be easy to read and clearly state the terms of payment. State the due date in bold font date in several places including the top of the invoice and the payment slip at the bottom. Include clear instructions on the payment types accepted, and clearly spell out any early payment discounts or late payment fees.

5. Shorten Days Receivables

Days receivables, also known as days sales outstanding (DSO) or accounts receivable days (A/R days), refers to the average time a customer takes to pay back a business for products or services purchased.

There are several ways to shorten days receivables: One way is to incentivize early payment with a small discount (see tip number 3). Incentivizing early payment through an electronic channel, such as ACH, is especially effective in reducing days receivables.

Your Cambridge Savings Bank small business banker can also provide products, services, and strategies to help you shorten days receivables. For example, by subscribing to a lockbox service, you can effectively outsource accounts receivable work to CSB and access your funds more quickly. A lockbox is a bank-operated mailing address or post office (PO) box your business can use to collect payments from your customers. Once customers send their payments to the secure bank lockbox, CSB withdraws and processes these payments, creates an accounting entry, and deposits these funds into your business banking account. We also generate daily reports to provide visibility into the funds coming into your lockbox.

Another solution offered by CSB is remote deposit capture (RDC), which enables you to deposit checks from your location using a computer or mobile device with an internet connection. RDC may be especially helpful to businesses that receive a large volume of checks. It makes cash available to your business sooner by eliminating the need to visit a physical branch to deposit funds and reduces the administrative burden of handling paper checks.

6. Audit and Improve Your Inventory

It’s important to understand which products are selling well and which are just taking up space. Reduce or eliminate products that aren’t selling, even if it means selling at a discount. Products that sit on the shelf can tie up a lot of cash and space and could hurt your cash flow. While it’s easy to hold onto products that were selling well and personal favorites, it pays to be objective, rather than emotional, when it comes to clearing out space for new merchandise.

For more information about how to successfully manage your business’ cash flow, please reach out to a Cambridge Savings Bank business banker today.

To better understand how your cash flow may change under different circumstances, please check out our Projecting Your Cash Flow Calculator.