Cash alone can spell the end of your business if it dries up. Several statistics show most startups perish due to mismanaged cash flows. However, planning for the winter in the spring can help you survive even the harshest weather. And that’s what cash flow management is all about: being prepared for the winter.

Every business owner, freelancer, or gig worker knows the cash flow glooms. Unlike a job, a fixed amount doesn’t get credited into a business owner’s account at a fixed date. Client payments are often delayed, and you incur more expenses from your pocket before getting reimbursed by the client. The cash inflow and outflow amount may tally, but the timing may not match. You cannot delay your employees’ salaries, loan installments, or utility bills because your client didn’t pay you on time. 

That’s where cash flow management is required.

What is Cash Flow Management?

There are three ways cash flows in and out of the business:

Operations: Your daily business operations involve invoice/sales and expenses where your accounts receivables and payables are managed. You can forecast your cash flow from operations.

Investments: This is the cash flow used for capital expenditures, such as buying equipment or a major marketing event. It also includes investing in shares, mutual funds, and other investment instruments. After accounting for operating cash flow, you can plan this cash flow by making a cash flow budget.

Financing is the cash flow in which cash comes in from loans or investors and goes out to repay loans, pay dividends, and buybacks. You can use this to arrange money for any gaps in payments and receivables.

Cash flow statements give you a bifurcation and help you understand where the cash is blocked, where you need it, and what channels you must access some money. This information can help you chart out strategies to manage cash.

Strategies to Manage Cash Flow

Cash flow strategies range from maintaining liquidity to preventing cash dryness, emergencies, and expansion. A business owner should have all four strategies and review them periodically to update them with changing business needs.

Maintain Liquidity

You must ensure timely payments from clients and vendors. One strategy is aligning vendor payment terms with your clients. To encourage clients to make timely or early payments, consider offering discounts and providing various payment options, such as cash, online transfer, check, and credit/debit card payments.

You could also have multiple suppliers and look for the best payment terms. While booking bulk orders, higher accuracy can reduce wastage. Overstating inventory requirements could tie up your cash until the inventory is sold. Understating inventory could lead to lost sales. You must maintain the right balance with efficient inventory management. While you may think inventory management is an added expense, it can save you significant cash.

Several ratios, such as days of inventory, quick ratio, cash flow cycles, and interest coverage ratio, help you determine how long your cash will last.

Accounting solution: An accountant can help you prepare a monthly and quarterly cash flow budget by looking at the estimated cash receipts and expenditures. If any big order is coming and you need more inventory, you can look at the budget, adjust, and ask the client for advance payments to fill the cash gap. The cloud accounting method helps you track your cash flow in real-time and warns if the cash in hand breaches the minimum threshold you have set.

Preventative Strategy Through Financial Forecasting

While cash flow budgeting can help you maintain liquidity and tackle small working cash flow needs, it cannot prepare you for the future. In the dynamic business world, you must prepare for good and bad. There could be a period of low growth, no revenue, or lower occupancy levels. At such times, you must have sufficient cash to meet fixed costs. 

Forecasting involves considering bullish and bearish scenarios and factors that could significantly alter the business’s operations, such as changes in taxation and government policies, competition, local economic conditions, demand, and raw material supply. These factors can either increase or decrease cash flow.

Accounting Solution: Considering all the factors, an accountant can help you prepare a forecast for the best and worst-case scenarios and determine the number you should keep as a cash reserve. This number will keep changing depending on the business and economic environment. If there is too much demand, a company may not want to hold too much cash reserves as inventory is fast selling, and holding cash could block investment and growth opportunities. If the demand weakens, a business might want to hold on to more cash to preserve liquidity. The accountant will keep updating the forecast to account for new developments.

Emergency Planning

No matter how many scenarios you factor in, business can surprise you. The 2020 pandemic is the most prominent example of an unexpected contingency that put many entrepreneurs out of business.

Always have Plan B for such contingencies. This plan could involve stashed-away long-term investments or a term loan approval. You could also consider selling low-return assets or taking a loan against some assets. Partnership arrangements with suppliers and other ways to generate liquidity during contingencies could also be considered.

Accounting solution: A professional accountant can help you improve cash flow from investing and financing. This requires careful balance sheet analysis, as assets need to be revalued. Ratios like debt-to-equity and return-on-equity can help raise capital.

Expansion Planning

Business expansion needs money to set up a new office/store in a new place, hire employees, and boost production and marketing. Most businesses make the mistake of fast expansion by taking in more debt than they can handle. While the near-term future might look bright, the situation can reverse. All your capital spending can lock your cash if the timeline between this outflow and the sales receivables is long.

Expansion comes with risk, but business owners can manage this risk with strong financial planning. For instance, consider the most extended amortization period to reduce monthly payouts if you are taking a loan. When the business prospers, you can accelerate debt repayment. This way, you keep your fixed costs low.

Every business situation is unique. What worked for one business may not work for the other, and what worked before for you may not work now. Cash flow must balance operations, capital expenditure, tax planning, and risk management.

Contact Ford Keast LLP in London, Ontario, to Help You Manage Your Cash Flow  

A professional accountant can help you manage cash flow efficiently by setting up processes, preparing and analyzing accounts, and identifying threats and opportunities early. At Ford Keast LLP, our accountants and bookkeepers can provide services such as preparing and analyzing books. To learn more about how Ford Keast LLP can provide you with the best accounting and bookkeeping expertise, contact us online or call us at 519-679-9330.