|Dave Pelland has extensive experience covering the business use of technology, networking and communications tools by companies of all sizes. Dave's editorial and corporate experience includes more than 10 years editing an electronic technology and communications industry newsletter for a global professional services firm.|
Improving Small Business Cash Flow
The expression "cash is king" may be a cliché, but like a number of clichés, it contains a element of truth.
Cash flow, in short, provides the heartbeat of a business. Cash comes in, and cash goes out, and hopefully, there is more of the former than the latter.
But although cash flow may be basic to the daily operations of a small business, managing cash effectively can be tricky for many companies.
Depending on the company and its industry, a business' income may be sporadic or seasonal, while expenses such as taxes, wages, insurance, rent, utilities, or marketing are more likely to be steady. This potential mismatch can cause cash shortages (and headaches) for business owners who don't have a firm grasp on the cash coming into their business, and good plans for managing it.
Cash Flow Basics
If your small business uses a cash accounting faces, monitoring cash flow should be relatively straightforward. As you sell products or perform services, customers pay you for those efforts, and you use the resulting cash to support your business.
If your company uses an accrual accounting method, in contrast, the link between revenue and cash can be a little more complex. Revenue is recorded when an invoice is issued, and income is recorded when payment is received on that invoice. This delay can easily create a situation where a company seems profitable on a revenue basis, but is cash-short and faces challenges in paying expenses.
Cash Management Strategies
Finance pros recommend a number of cash management strategies to help optimize cash flow and prevent potential cash-related issues.
As an early step, it's critical to prepare a cash flow budget for your business. Ask your accountant or bookkeeper to help you establish a budget and cash flow statements to help you understand when payments are made and expenses are due.
A cash flow statement will help you understand payments received on a weekly, monthly, or quarterly basis, which can provide a different view of your business then relying on annual or year-to-date revenue statements.
Other effective cash flow management strategies include:
By paying careful attention to cash flow and cash management strategies, business owners can help reduce the odds of encountering cash shortages or other financial problems.
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