Managing cash flow is one of the most important aspects of running a business.
Cash is the essential life force of commerce, underpinning all types of B2B and B2C transactions. Without cash, your business (and much of the world’s economy) simply doesn’t run. You’d have trouble paying your vendors, employees, and yourself.
But managing cash flow can be a challenging endeavor, affected by many internal and external factors.
Fortunately, there are a few key cash optimization levers at your disposal:
- Managing Accounts Payable & Accounts Receivable
- Tax Strategy and Planning
- Cash Forecasting and Real-time Budget Monitoring
- Improving Your Margins
- Attracting Investors (or getting the right loan)
Managing Accounts Receivable and Payable (AR/AP)
Personnel costs, taxes, and accounts payable likely make up the majority of your cash outflow. Negotiating favorable payment terms with your vendors can create a little extra breathing room.
But, try to make sure your customers don’t do the same to you.
Ideally, customer payment terms should be shorter than your supplier payment terms, ensuring that you get paid before you need to pay your suppliers. Financing both your customers and suppliers is a tough position to be in.
Perhaps it goes without saying, but managing the level of credit extended to your customers is a critical aspect of accounts receivable. Extending too much credit to unworthy or unstable customers is a recipe for disaster.
Strictly managing AR/AP is crucial to maintaining positive cash flow. However, keep in mind that optimizing payment terms only offers a one-time improvement of your cash position. There are a few other levers that can help more sustainably.
Better Tax Planning
Taxes are another huge business expense, and one that can have a major impact on your cash flow. A great tax strategy involves both planning ahead and minimizing taxes due.
Your CPA can help you minimize your tax burden through optimizing your business structure and by making sure that you’re applying all available tax credits and deductions for which your business qualifies.
On top of minimizing your tax liability, planning ahead for your quarterly and annual estimated tax payments can help to avoid unpleasant surprises. The government wants its money, and typically won’t accept late or missed payments without significant penalties.
Setting aside what you owe in advance can save your business from a cash emergency.
Cash Forecasting and Real-time Budget Monitoring
Modern accounting firms offer more than simple bookkeeping services. Many are moving into a more strategic role, offering part-time CFO services to play a more strategic role in their clients’ businesses.
In the CFO function, your accountant can help you develop a robust cash forecasting process so that you’re able to make efficient use of your capital. Knowing what’s going out when will help you make better business decisions.
Real-time monitoring also gives an added level of protection against getting caught with too little liquidity to pay your bills.
Have your financial advisor set you up with the proper software tools to allow for comprehensive monthly reporting and real-time dashboards.
Improve Your Margins
For whatever reason, improving business cash flow through higher profit margins is a sometimes overlooked (but critical) method of optimization. Improved profitability sends more of your revenue to the bottom line, keeping more cash in your business.
Improving your margin on sales can be achieved by:
- Improving your COGS through higher efficiency or lower material cost
- Minimizing fixed monthly expenses
- Increasing revenue
Charging higher prices is one way to increase revenue. Or, you could get rid of high-maintenance, low-value customers.
You know the type, right? The kind of client who demands the world in terms of effort on your part, but always seems to pick the cheapest, lowest margin products.
Attract Investors or Get the Right Loan
Certain businesses need to hit scale in order to reach the breakeven point. Even with a great concept, these businesses may need some outside capital to achieve that scale.
Others need extra cash to ramp up activity for a busy season – like Christmas or summertime.
These businesses need outside financing to get to the point where they are self-sustaining, or just as a bit of a buffer. This liquidity can come in the form of an external investor, or a loan tailored to your needs.
Optimize your Business Cash Flow
If these tips sound great, but a bit overwhelming, you’re in the right spot.
Better cashflow sounds great, but who’s going to research and implement these suggestions? You’ve got a full plate as it is, trying to get new customers and profitably grow your business.
Much of cash flow optimization lies in planning ahead for future obligations. A true financial partner helps you best manage your small business accounting needs, covering aspects like:
- Bookkeeping
- Tax Strategy
- Cash management advice
- Part-time / Virtual CFO
If you’re ready to implement some of these cash flow optimization strategies, but aren’t sure where to start, request a free consultation from Adian. We’re happy to help.
Then, you can focus on what matters to your business.