As the key indicator of your business’s financial health, cash flow is the lifeblood of your small business. The past two years have been incredibly challenging for people and businesses. Small companies are one of the hardest-hit groups. Whether dealing with closures, decreased business traffic, or supply chain issues, business owners learned firsthand the value of maintaining good cash flow.

If you haven’t put much thought into cash flow for small businesses, now is the time to start.

Understanding Cash Flow

Cash flow is exactly what it sounds like: the amount of money flowing in and out of your business at any given point in time. Companies that don’t pay attention to this are more likely to struggle when something unexpected happens.

It’s essential to properly manage cash flow for small businesses. It allows you to identify potential surpluses and shortages. This is an integral piece for business planning and implementation, as you need money to operate your business.

There may be some months where your available funds are negative due to the seasonality of your business. When you stay on top of it, you are prepared for those times.

Managing Your Cash Flow

There are various ways you can better manage liquidity for small businesses. One of the first steps is to control your inflow in accounts receivable. Many different payment methods are available, but that doesn’t mean you have to accept them all. Choose a few payment options that work best for your business (and customers are most likely to use) and stick with those. This creates uniformity and reduces any confusion related to accounts receivable.

Next, decide how you’re going to pay your bills. Autopay is a great option for many business owners. It reduces the amount of time you have to spend on this task. Also, on time payments keep your vendors happy. Autopay allows you to spread costs strategically through the month by choosing your payment date.

If certain bills tend to hit the books at a challenging time of the month for your cash flow, ask about adjusting your payment date. You can also attempt to negotiate different payment terms that help even out in your cash flow.

Handling a Surplus or Shortage

Set reminders for yourself to analyze your cash flow regularly. If you’re using a bookkeeping service, those numbers are be done for you and easy to access and review. By reviewing the numbers regularly, you can see if you are trending toward a surplus or shortage and make adjustments.

Managing cash flow for small businesses can be a roller coaster ride in some industries, especially if your business is seasonal. If you find that you have a cash surplus, hold some back in a rainy day fund to keep you afloat when those shortages come about.

If you have a surplus and already have some business savings in place, you might choose to pay down debt, invest that money back in your business, or pay yourself a bonus.

If you’re facing a shortage in your cash flow, there are a few options to handle it.

• Review your income and expenses
• Look for opportunities to impact your cash flow
• Can you bring in more money
• Should you reduce your spending

If you find yourself in the red and have business savings available, you might consider pulling from savings to balance it out. A business line of credit is another option to cover the shortage, though you will need documentation of your business finances to apply for a business loan.

Still Feeling Unsure?

If your business has struggled with understanding this important bookkeeping principal, you’re not alone. If you need help staying on top of your business bookkeeping, reach out to me and schedule a quick call to learn how I support small business owners.