Prudent business owners take measures to smooth out cash fluctuations that are a normal part of the business cycle.  Follow these four practices to moderate the ebb and flow of your cash:

  1. Analyze cash every month: Analyzing cash doesn’t have to be complicated.  Start by writing down your cash balance at the beginning of the month, then add all the cash that came in during the month from all sources.  Finally subtract all of the outgoing cash and calculate the ending cash balance.   After a few months, review the ending cash balances of each month and compare them.  If your cash balance is decreasing month after month, then your business has a negative cash flow (not good).  If the ending balance is increasing, then your cash flow is positive (the goal).  You should keep record of the cash balances over the course of a and run a trend analysis to determine the causes ups and downs.   If you are funding your business with loans, be sure to leave this money out of the analysis so you can gauge the true cash flow from operations.
  2.  Monitor your customer balances:   It is easy to fall short in the management of your accounts receivable (money owed to you from customers).  Put in to place adequate pre-qualifying processes before extending credit to customers.  Always use a software system to track who owes you money so that you can follow up with customers and send invoices and statements.  A last resort would be to factor or sell your receivables to a factoring company to maintain a predictable cash flow.   Just keep in mind that factoring isn’t free!  There are several new companies out there that will fund your receivables for a fee – check out Fundbox amd Blue Vine.
  3. Slow down your cash disbursements:  Prudent cash flow management dictates that you retain cash as long as possible.  This doesn’t mean you become a deadbeat customer to your own vendors – you still have to pay on time, just not too early and not late.  If your vendor offers any sort of early payment discount like a 2% 10, net 30 you will always want to take advantage of the cost savings.  You can also try negotiating extended payment times with your vendors.   The longer the cash stays in your bank account, the better.  Try keeping the majority of your idle cash in an interest bearing account when possible as long as the monthly and transaction fees are not too steep or eating up any interest you might be earning.
  4. Time large expenses:  Get in to the habit of setting aside small amounts to fund large expected expenditures such as business license renewals and quarterly estimated tax payments.  You may also want to start an equipment fund, to save up for large capital assets that will eventually need to be replaced.  Being prepared for large purchases with a fully funded savings account will give you peace of mind all year long.  It is best to put the money in a separate account that you don’t have regular  or easy access to, that way you are not tempted to “raid’ it for splurge purchases.

Give these cash management techniques a try and give us some feedback on how you made out.  Do you have other ideas that work for you?  Share them in the comments below.

Pin It on Pinterest

Share This