Every business owner should be closely monitoring their cash flow, but unfortunately, many don’t. A healthy cash flow is an indicator of a healthy business, which is why it is so important to manage it properly. However, this can be challenging if you don’t know what you should be looking at to make that assessment.
Plenty of causes can lead to inaccurate cash flow management, like:
Poor cash flow forecasting
Late or missed payments
Poor inventory management
Poor financial management
When these problems present themselves, you need to be able to spot the issue and make quick adjustments.
Poor Cash Flow Forecasting
Cash flow forecasting can be difficult, but it's also one of the most crucial elements to managing your finances.
Poor cash flow forecasting can lead to stomach-churning moments when you realize there's simply not enough money on hand to cover expenses, including making payments to service providers or being able to run payroll.
How to Avoid Cash Flow Problems
The best way to avoid cash flow problems is to focus on knowing your numbers. This will help you prepare for what is coming and when.
This is especially important for recurring expenses, like payroll, rent, monthly software subscriptions, etc. Knowing these numbers allows you to adequately plan in advance to ensure there’s enough cash on hand to cover them.
Another important piece to avoiding cash flow problems is to be prepared. Business owners should have a cushion to help with the valleys of running a business and unexpected expenses or increases. At Little Fish Accounting, we recommend a cushion of 3-6 months of expenses.
There is nothing more frustrating than completing work for a client and then struggling to get paid for it. Late payments can wreak havoc on a business's cash flow, especially in instances where companies incur a significant amount of out-of-pocket expenses during the course of a project.
After all, payments to employees, suppliers, and creditors still need to be made while you chase down the money you're owed.
How to Avoid Late Payments
Avoiding late payments starts with you. Ensure invoices are sent to customers in a timely manner as work is completed and that there is a mechanism in place to easily follow up on unpaid invoices. A cloud accounting system can help with this. These systems have the ability to generate invoices and easily track payment status including accounts receivable and accounts payable reporting.
It’s also essential to have an appropriate follow-up process. This should include things like automatic reminders and a regular cadence of review to see what’s outstanding so that is can be addressed quickly.
Another tip is to incorporate milestone payments. This means collecting a small amount of the total payment throughout the project, instead of all at once when the project is completed. This keeps you from waiting for payments until the very end and is especially helpful when there are out-of-pocket expenses throughout the project.
By implementing the systems and following the plan outlined above, there is a higher likelihood you’ll get paid on time. Remember to stick to the plan and continue requesting payment until you receive what’s owed to you.
Unexpected expenses strike every company now and then - and sometimes they make a significant impact.
Businesses that are unprepared for these unplanned costs experience serious cash flow problems in the aftermath.
Unfortunately, many companies underestimate small, day-to-day expenses as well, which can accrue over time and leave a big hole in the budget.
How to Avoid Underestimating Expenses
Once again, the answer can be found in the valuable financial data of your business.
Look back over weekly, monthly, quarterly, and yearly expenses to establish a sustainable budget that will keep you on track.
In addition, you may find seasonal or monthly trends that, when anticipated, can be smoothed out to eliminate any cash flow problems. These fluctuations can also happen based on your business/industry.
Take Little Fish Accounting for example. We have a large influx of income in the first four months of the year due to tax season. This means we have to strategically plan for the remainder of the year when we know income will be lower.
Poor Financial Management
Unfortunately, bad financial decisions can also contribute to cash flow issues. Generally, it's not a lack of intelligence or business sense - these issues stem from a lack of understanding of crucial issues, which contributes to costly mistakes.
Bad investments can also lead to cash flow issues, as can taking in too much debt or spending too much money in a particular area of your business that isn’t producing the results you expected.
Another common mistake is withdrawing too much money for personal expenses without planning properly. This will leave you without enough cash to cover your operating expenses.
How to Avoid Poor Financial Management
Financial management isn’t everyone’s cup of tea. And let’s face it, you didn't start a business to deal with financial forecasts and budgeting.
This is where the experts come in.
At Little Fish Accounting, our knowledgeable, friendly experts can assist with preparing you so can avoid cash flow issues, regardless of whether they're new or long-standing, easily diagnosed, or hard to understand. We’ve got you covered!
Check out our services to learn more about how we can help get a handle on your cash flow and get you on track to thrive!