4 Ways Businesses Can Better Control Cash Flow

From the moment they start, business owners must monitor cash flow closely. Even companies with strong sales can face trouble without enough liquidity to pay employees and cover bills. Here are four ways businesses can better control cash flow.

1. Stick to the Budget

Creating and maintaining a detailed annual budget is essential for good cash flow management. Your budget should align with your strategic goals. If an item doesn’t support a specific goal, reconsider its necessity. This approach helps avoid unnecessary spending and keeps funds available for essential needs.

For analytical purposes, a budget is useful only if updated regularly to reflect actual spending. You might have overbudgeted or underbudgeted on some items, spending more or less than anticipated.

2. Check Your Statement of Cash Flows

Businesses should generate financial statements, ideally conforming to Generally Accepted Accounting Principles (GAAP). These typically include:

• The income statement
• The balance sheet
• The statement of cash flows

When monitoring cash flow, focus on the statement of cash flows. This document reports your business’s net increase or decrease in cash, factoring in daily operations, asset purchases, sale proceeds, and financing activities. Excluding noncash items, it helps identify potential cash flow issues.

To maximize the benefit, generate this statement monthly. Quarterly or annual statements can also help identify trends.

3. Exercise Expense Management

Maintaining accurate, up-to-date expense records is crucial for managing cash flow and striving for profitability. Review the data for ways to reduce operating expenses. For example, outsourcing areas like human resources, payroll, benefits management, or IT support can save money.

If you have inventory, reconsider your management approach. The “just-in-time” method involves buying items or materials only when necessary, reducing carrying costs for storage, insurance, and interest payments. While not feasible for every business, improved logistical support may make it a viable option.

4. Mind Your Timing

Effective management hinges on the timing of revenue inflows and payment outflows. Look for ways to stabilize both.

Conduct credit and reference checks on new customers to validate payment histories and minimize collection risks. Prevent invoicing errors and delays by maintaining accurate customer account data.

Send invoices promptly using electronic billing methods where possible. Establish systematic procedures for following up on past-due accounts, acting before they are 60 or 90 days late.

Also, manage your payables strategically. Avoid paying invoices earlier than necessary unless offered a discount. Use your buying power to negotiate discounts, low-cost financing, or extended payment terms for large or frequent purchases.

Go with the Flow

Effective cash flow management is challenging for many small to midsize businesses, but it’s crucial for success. By implementing these strategies, you can improve your control over cash flow. For more help with this critical task, contact us.