Cash is critical to the functioning of every business. Maintaining a healthy cash flow allows a company to meet its financial obligations and gives it flexibility to take advantage of emerging opportunities.
Small businesses often find themselves in a cash crunch, struggling to pay the bills and stay afloat — never mind having cash available to seize a better deal when opportunity presents. The good news is that businesses can take various measures to manage cash flow more effectively.
A good place to start is by reviewing expenses to determine if there are areas where you can shave costs. Every dollar not spent translates directly to the bottom line — and the higher the profit margin, the more cash can be made available in the checkbook. One way to control expenses is by contracting with alternative vendors and suppliers, or by renegotiating existing contracts. Costs for ongoing goods and services, such as utilities, shipping, and telecommunications, should be reviewed frequently to see if expenses can be reduced. And when paying suppliers, consider whether it makes financial sense to take advantage of any early payment incentives that may be offered. Easy credit can add expensive finance charges that bleed cash away.
Keeping Debt in Check
Debt can be a useful tool if used properly, but be sure to keep it at a manageable level. Before your business takes on a new loan, reach out to multiple lenders and compare the terms they offer. When acquiring equipment, consider whether leasing may be a better option than borrowing money to finance its purchase. Many leases for capital assets are financially just repackaged debt instruments to ensure that the lessor recovers their whole cost plus interest and fees! Try looking into used or second-hand equipment acquisitions, or outsourced services rather than asset capitalization at all.
For short-term financing needs, a line of credit is a helpful tool. The lender will base interest charges only on the amount your business draws from the credit line. Beware of carrying rolling balances at high interest rates, though!
Maintaining excessive inventory can tie up cash unnecessarily. If your business carries inventory, avoid overstocking. Your inventory management system should be able to indicate the minimum quantities that you need to keep on hand in order to meet your customers’ needs. Don’t overlook the investment costs tied up in work-in-progress, too — an often underestimated source of inventory carrying costs. Work-in-progress holds the cost of labor and materials that go into starting jobs or production streams, but doesn’t become liquid again as available cash until it is completed, billed, and payment is received from the customer. Meanwhile, the time-value of money can actually depreciate in inventory, if held too long.
Simplifying Billing and Collections
Employees who handle billing and collections should have specific, clear guidelines. By standardizing the process, you help ensure your business will be paid promptly. You can speed up payments by offering discounts for early payment or by encouraging your customers to pay using electronic funds transfer. A policy of requiring downpayments or deposits from customers boosts cash flow and reduces accounts receivable. To help minimize the problem of unpaid accounts, consider making follow-up calls or sending email or text message reminders within a set period after you have provided goods or services, or when a bill’s due date arrives.
Minimizing Taxes When Possible
Deductions and credits can help your business limit its tax burden and boost its cash flow. A knowledgeable tax professional can keep you informed of any special tax breaks that may be of value to your business, such as the energy credit for the acquisition of various types of alternative energy property. A knowledgeable tax professional is crucial to streamlining bookkeeping and payroll overhead expenses, helping with basic (and advanced) business analytics, and other useful managerial accounting services for improved business and financial performance. At Baum CPA, our expert accountants specialize in smart, accessible, professional service delivery. You can book a free initial consultation, to find out more how we can help you! Just click here.
Make Planning a Priority
Identifying the causes of reduced cash flow and taking steps to remedy a cash flow crunch are critical to the ongoing success of your business. Proper cash flow planning can help you make better use of budgets and employ financing and capital more effectively to increase revenues as well as boost profits. If erratic cash flow is a recurring issue for your business, it can be helpful to gain the insights and the input from an experienced financial professional. Why not check out Baum CPA today?
This blog and its authors provide this content strictly for informational purposes. No content herein should be misconstrued as financial advice. Everyone’s specific circumstances vary — Always consult with a qualified, licensed financial advisor, legal counsel, and tax professional before venturing into any investment or business activities.