Being a business owner comes with challenges, no matter what industry you’re in. Cashflow management is one of these challenges! Poor cashflow management and accounting will quickly put you out of business. Whether you’ve just started your business or you’ve been running it for years, it’s always a good time to implement a good cashflow management strategy, including:
- Knowing when your business will break even
- Incentivizing your customers to make early payments
- Scheduling your payments on different days of the month
- Keeping cash reserves
If you want to find out more about these and other small business accounting tips, keep reading! They will make your life as an entrepreneur easier and make you more likely to succeed.
1. Know your breakeven point
Of course, as a business, you don’t want to just break even. You want to profit as much as possible! But in order to start profiting, you need some goals. Make sure you know exactly what amount of money your business needs to be profitable.
Don’t just keep a rough estimate of your expenses in mind. It’s better to calculate an exact number for your breakeven point. This will help you set goals for your business, price out your products, and more. Your breakeven point will also help you understand how minor price increases or decreases will impact your business’s bottom line.
2. Send your invoices immediately
Your customers aren’t going to pay their bills if you aren’t invoicing them. Don’t wait to send invoices to customers. The longer it takes for you to collect, the longer you’ll go without the cash that you need to run your business. Some of your customers may even appreciate how on top of things you are.
If time has gone by and you haven’t heard anything back from your customers about payments, send a reminder. You can never be too careful when it comes to collecting. Remember that you don’t need to feel bad about collecting money in a timely manner. It’s nothing personal. It’s business. And you need money to run your business!
3. Incentivize early payments
You can send your invoices as early as you want, but sometimes customers don’t pay when they’re supposed to. However, there are things you can do to encourage your customers to pay as soon as possible. Consider offering them perks like discounts or freebies.
It may not encourage everyone to pay early, but some people will definitely take notice. This will help you bring more money in on a regular basis, which will help you pay your own bills in a timely manner. Your customers will also love getting extras while avoiding late fees!
4. Lease equipment when you can
One of the most effective ways to help manage your cashflow is to decrease your expenses. But that’s a lot easier said than done, right? Some expenses are just inevitable. That’s why you need to come up with clever ways to lower your operating costs.
Depending on what kind of business you have, the equipment that you use in your day-to-day operations can be one of the biggest expenses. You can’t run your business without equipment, but you may have the option of leasing some of the equipment like vehicles and computers. By leasing, you get the latest technology, which sometimes means the most effective equipment. As an added bonus, you can expense these leases on your business taxes.
5. Create a payment plan for customers
Your transactions with your customers fuel your business. But if you run a service, you may not get any money from your customers until after you’ve completed all the work they need. This limits your access to cash, especially if your services take a long time to complete. Consider creating some kind of payment plan for your customers so you have more steady access to cash.
For example, if you run a service business, it’s always best to start off by requiring customers to make a down payment. Then they can pay more once you’ve started your services, and they can pay the full balance once the work has been completed. This helps you receive the money you need over time rather than a chunk all at once.
6. Make your payments on the final day
When you have cash, hold onto it for as long as possible. That’s why it’s helpful to not only have your customers pay as soon as possible but also to pay your bills as late as possible. Of course, you don’t want to make late payments. You just want to prolong the amount of time you have money in your business account.
To avoid missing payments, schedule them. You can have them scheduled for the last day before your payments are due.
7. Give an employee the task of monitoring cash flow
When you’re doing it right, monitoring cashflow is time-consuming. But as a business owner, you’re strapped for time as is. To ensure that your cashflow is getting the proper amount of attention, you might want to assign an employee the task of checking up on your finances. This person should be reliable and as knowledgeable about finances and accounting as possible.
Of course, you still want to know what’s going on with your cashflow. Just because you have someone else who is in charge of it does not mean it’s only their responsibility. You should decide on what important information the monitor needs to be telling you. It’s a good idea to set revenue goals. Every time you reach those goals, the monitor should notify you.
8. Schedule payments on different days
If you pay all your bills on the same day of every month, you’re hurting your cash flow. A lot of business owners do this because it’s convenient. But it complicates budgeting and means you have less access to cash at certain points of the month.
So instead, try to spread out your recurring payments. Schedule them throughout the month, rather than all at the beginning or at the end. Your business account will take less of a hit. Just make sure you decide on payment dates that make sense for when the bills are actually due.
9. Keep cash reserves
Just like you should always have emergency cash on hand for your personal finances, your business needs cash reserves. The best thing you can do is have three to six months of business expenses saved up. This way, when you end up going through a slower business period or you have some unexpected expenses, you don’t have to sweat it. Your cash reserves will keep you afloat even when you have little to no money coming in for a short period of time. Just make sure you are working on replenishing your cash reserves soon after you use them up.
10. Always be looking ahead
A key part of cashflow management strategy is always looking ahead to how your business’s financial situation could change in the future. By monitoring your projected profits, you’ll know how your revenue is expected to change over time. You should also monitor outside circumstances that could affect your business. For example, keeping an eye on the economy in general is important. If there’s a recession around the corner, you’ll want to know so you can start preparing quickly.
Small businesses were hit especially hard during the last financial crisis in 2008. If another recession happens while you’re in business, you should prepare for the worst. It’s times like these that you’ll be glad you had those cash reserves to hold you up!
The road to becoming a profitable small business can be a long one. But with these principles in mind, you can do it! Make sure you’re always tracking revenue patterns and looking ahead. Hang on to as much revenue as you can for as long as you can without being penalized. And if you find areas where you can cut down on costs, do it.