There’s a lot to consider when managing the finances of a small business or your digital asset management for video production. But everything starts and ends with cash. You can’t pay your expenses with pending revenue or projected profits, and while credit is important, an overreliance or misstep can lead to incurring significant fees.
There is no getting around it, you need cold hard cash on hand to keep the lights on and the business going.
Cash flow management is the starting point for overseeing your business’s finances. Once you understand the money coming in and out of your business, you can begin to analyze profit margins, project future income, and plan for future growth and purchases.
Good cash flow management is vital for small businesses.. Research by U.S. Bank found the most common factor (82%) causing small businesses to fail is poor cash flow management or a poor understanding of cash flow.
Even the best idea in the world can fail when cash flow is mismanaged. So what do you need to keep in mind when it comes to cash flow management?
In the end, a lot of cash flow management is about getting money through the door. This is done by encouraging and facilitating quick accounts receivable, and holding onto the money you have by delaying your accounts payable as much as is fair and reasonable to your vendors.
Here are seven tips to better manage your small business’s money.
#1. Let Technology Do the Work
It’s 2022. There’s no excuse for not having dedicated software to help manage cash flow. Technology is much better at keeping track of all the money that comes and goes in your company.
Whether it is to:
- Track the raw data
- Implement processes (e.g., bill payment systems)
- Analyze your finances
- Set reminders to chase down clients
- Or you want to take it a step further and automate parts of your cash flow management
There is a technology solution to match your needs.
#2. Keep the Books Accurate and Up-To-Date
You can’t manage cash flow properly without accurate and up-to-date bookkeeping. Accountants are very organized people with an eye for detail and systems that take everything into account. So outsourcing your business’s bookkeeping can somewhat remove the burden from you and your staff. But it may not be the right choice for you.
Maintaining accurate and up-to-date business accounts means establishing a system that regularly updates information and stores all the relevant records you need (sales income, purchases/expenses, funding, payroll data, etc.).
#3. Stay On Top of Your Accounts Receivable
The first thing to consider when configuring your accounts receivable is the level of risk you are willing to accept as a company. If the answer is zero, you should only do business with cash upfront. However, if you want to offer your services to a broader market, you may have to provide credit.
In this instance, you need effective accounts receivable processes to ensure the cash on your balance sheet flows into your bank account. This could be through a combination of incentives (early payment discounts) and penalties (late fees) or proactively reminding clients of their payments.
A useful metric to understand how efficiently you receive payments and collect on credit is accounts receivable turnover. This is the ratio of your net sales on credit divided by your average accounts receivable for a given period. An increase in this value shows that you may need to rethink your accounts receivable processes.
#4. Send Invoices as Quickly as Possible
An essential aspect of getting paid for services as quickly as possible is telling your clients how much they owe. Don’t wait around. Send invoices out immediately. There will likely be a bill payment system on the other end. Promptly providing invoices triggers that system faster. Getting the process moving on the client end helps get the cash sent sooner.
#5. Understand Different Payment Methods
Many businesses will select a single payment method and stick with that for all their expenses. However, there is a range of payment options available, and depending on the expense or the point in your cash flow cycle, it may be beneficial to choose one over the rest.
For example, checks have an inherent delay because they need to be physically transferred to the client. The mailing time can offer temporary respite during particularly challenging cash flow situations. However, this may not be an option if the payment has a hard deadline before penalties occur.
Another option is a credit card; however, these have the possibility of additional transaction fees and the risk of high interest in the event of missed payments. Many online payments services are now available, some of which are free to use and even offer rewards based on different criteria.
#6. Save for a Rainy Day with a Cash Reserve
While building a cash reserve may feel like a wasted asset, it is the ultimate safety net to prevent serious cash flow problems. If an unexpected expense or drop in revenue occurs, a cash reserve prevents you from missing payments, having to find new lenders, or going into debt. It can also give you the flexibility to quickly seize new opportunities without worrying about financing.
There are many ways to start building up your cash reserve, including identifying cost savings or liquidating any cash tied up in unnecessary assets.
#7. It’s Nothing Personal
To maintain control of your company’s cash flow, it is vitally important to keep business and personal finances separate, with different accounts for each. This keeps all of your business’s money in one place, simplifying how you track, understand, and forecast your company’s performance.