Cash flow is often misunderstood. It isn’t how much money a business makes, it’s how much money is flowing through the business at a given time.
"Cash flow refers to the inflows and outflows of money into your business and how the timing of this impacts how you operate," says Meghan Larson, Commercial Banking Advisor with Envision Financial. "It doesn’t matter how great your product is, if you can’t get through cash flow cycles, you won’t be able to produce it."
Imagine cash is an employee: if your employees don’t show up to work one day, you can’t properly service your customers. In order to keep business moving you need working capital — and that’s where cash flow comes in. Here are a few ways to maintain positive cash flow.
1. Invoice quickly
No one is going to pay you out of the goodness of their hearts. It may seem obvious but invoice as soon as possible in order to see your cash sooner than later. Be sure to make the terms as clear as possible and confirm that your invoice is addressed to the person who will turn it around the fastest.
Are you working on a long-term project? Be open with your client and negotiate clear and fair payment terms, including agreed upon regular payments throughout the project. Don’t wait to get paid at the end. Most clients will understand as long as you negotiate clear and fair terms with them.
2. Use credit strategically
There are times when you may need to lean on some form of credit in order to get you through a low cash flow period. In cases like these, don’t fear credit — it can allow you the flexibility to get things done in order to keep business moving forward. When it comes to credit, the most important thing is to have a plan of how you will manage it — this plan may be to pay down a loan incrementally, or pay it off at once. Either way, having the plan is paramount.
There are times to use short-term financing, like credit cards, and there may be times that you utilize a lower interest loan in order to cover expenses over a longer period of time. For instance, credit cards are good for things like small online purchases that you know you can pay off right away.
If you need to make a renovation to your home office, you are better off looking at a long-term loan that you can manage over a longer period and not face high interest charges.
Additionally, many credit cards offer reward programs that can be used strategically. If you have the cash to pay off a credit card purchase right away, why not use the credit card, gain the reward points, and then pay off the debt immediately? Reward points can often be converted into cash back — our Platinum Card is an example of this.
3. Know thyself
There aren’t many business owners who start a business just so they can monitor cash flow. It isn’t exactly the most exciting part about entrepreneurship — but it may well be the most important part. Understand your personality in relationship with managing your business’s finances.
If you tend to avoid keeping an eye on the books then consider hiring someone to do it for you. While it may seem like an extra expense, you may be leaving money on the table by not attending to your finances on a regular basis. A good accountant or bookkeeper can be worth their weight in cash flow. Err, we mean, gold.
4. Price for profit
If you consistently struggle with positive cash flow, ask yourself one simple question: am I charging enough for my goods and/or services? Be sure that you are not only covering your costs of doing business but that your margins include making a profit.
Savvy business people treat profit as an expense — that way you know you are going to make it. For instance, if you know your hard costs on an item are $2 and you are charging $3, does that 50% margin only cover your operating expenses? The key is to factor in an end-of-the-day PROFIT on your goods and services — otherwise there is no point in being in business!
5. Good cop, bad customer
Whether it’s consistently having to track a customer down to get paid on time, dealing with unwarranted complaints, or having a customer routinely return products without an understandable reason, the fact is there are certain customers who aren’t worth trying to satisfy. They take up more of your time than they are worth.
Sometimes your best option is to sever ties with them. If you spend more time trying to satisfy the unsatisfiable or wondering if you’ll ever get paid, save yourself the heartache and find a better customer relationship.
One way to draw a line in the sand is to think about what your time is worth per hour. How much would you pay someone to do your role, and how much is that sale worth? You might be surprised how much of your salary you’re spending chasing dead ends instead of acquiring more business.
6. Learn to juggle
Monitoring cash flow is a lot like juggling. At any given time when juggling, some of the balls will be in the air and some will (hopefully) be in your hands. The goal isn’t to have all of the balls in your hands at once: the goal is to know where all of the balls are at all times.
Another aim is to know how far away the balls are and approximately when they will be returning to your hands.
You can imagine what would happen if you looked away, even for an instant. Same goes for cash flow. Keep in mind you don’t have to be the only person juggling. In fact, it is a good idea to have someone else who is monitoring what balls are where and when.
Maintaining positive cash flow enables you to focus on building your business without slowing down operations. A car won’t run without gas, a business won’t run without cash — be sure your tank is full!
Have questions about managing cash flow for your business? We're here to help. Contact your Business Banking Advisor or call us at 1-888-597-6083.