Cash flow is essential to the management of any business, but it is especially important for small businesses, which tend to operate on tighter budgets. Small businesses are also often forced to focus on what’s happening in the short term, but it’s important not to forget what’s coming. Let’s take a look at why a strategic approach to your cash flow is so important, as well as some tips for ensuring that your business stays on track.

Why is cash flow so important?

Cash flow measures how much money is coming in versus how much is going out, and a strategic approach to this area is imperative so that your business can cover expenses, manage debt, and invest for future growth. Plus, this is an important way to plan for future and unexpected expenses. We recommend that most small business owners forecast earnings and expenses for three to six months out, while some businesses may have unique needs that change this range.

Start on the right foot

Here are some tips for ensuring your small business is on pace to stay in the black:

1. Customers who are not prompt with payments are a common challenge to cash flow. There are steps you can take to ensure this does not happen. From the outset, set very clear payment expectations with the customer. You may even ask for a deposit to start the process.
2. On your end, make sure to invoice the customer as soon as the work is completed and not wait until a month later for payment. Some companies even offer a discount to those customers that pay faster. Similarly, businesses may impose penalties on customers for late payment. It is also common to set up an online payment system that automatically processes the invoice as scheduled.
3. Offer the customer a variety of payment options. If you are still only accepting checks, this greatly limits their options. Accepting credit cards or other forms of digital payment allows customers to pay faster, which has a positive effect on your cash flow.
4. Consider an invoicing tool, like QuickBooks, that makes it easier to generate invoices, track payments, issue automatic reminders, and integrate with your bookkeeping. The investment is well worth it in terms of getting payment to you faster.
5. Have a cash reserve to cover at least three months of expenses. Having this financial safety net protects you from cash flow issues in the present while allowing you time to identify what caused the problem in the first place.

We’re here to help

If you have questions about your small business’ cash flow, please contact our Business Tax and Advisory team. We are here to support your small business’s financial success.

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