Problems with cash flow can not only affect the financial well-being of your company but also have non-financial costs. Here are just a few ways that poor cash flow can affect your business.
- Higher interest and bank charges
When you constantly have to turn to your lending institution for funding, you will accrue extra costs that will affect your profit. If you borrow outside of their credit terms, you can accumulate bank fees and interest very quickly. Ensure you have the best loan and overdraft protection for your business.
- Poor relationships with suppliers
Poor cash flow could result in being consistently late with your payments to suppliers which could put a serious strain on your relationships with them and affect delivery times for your customers.
- Stress
Having cash flow problems can create stress and health issues. Stress affects your business relationships with employees and customers – two groups that have much value to you and your company. It also affects your physical, mental, and behavioral health and in turn can affect employee morale.
- Missing out on opportunities
Poor cash flow may lead to you having to pass up on great opportunities that could propel your business forward. For example, you may not be able to invest in a piece of equipment that will increase productivity or take a trip to a networking event hosted by important people in your industry.
Tips on Managing Cash Flow
Tip #1: Regularly Review Your Cash Flow
Looking over your cash flow statement once a month isn’t enough. Just like with your personal finances, you should be checking on your business finances weekly. A CPA can help with creating budgets, money management tips and creating financial statements including cash flow statements that will help with monitoring your business financial condition.
Tip #2: Maintain a Constant Cash Reserve
Most businesses will experience cash flow constraints due to seasonality factors, capital purchases, unforeseen expenses, etc.. Shortfalls are inevitable for any business owner, even the ones with the best plans in place. Your business’s survival will likely depend on how you are able to traverse these shortfalls by maintaining a cash reserve that you don’t dip into unless it’s an emergency.
Tip #3: Collect Receivables Immediately and Offer Discounts for Early Payments
Any invoices that will be paid to you, try to make them “due immediately” and/or limit net use terms to be no longer than 15 days, this way you’re getting cash in the door as quickly as possible. Offering discounts is a good incentive to encourage your customers to pay early. Offering customers to be able to pay by credit card can also improve cash flow for a small cost.
Tip #4: Track Your Cash Flow Statement
Strong businesses have a firm grip on their financial reality. The best way to do this is with your cash flow statement. Over time, all businesses have to generate positive cash flow or the business will not survive. The cash flow statement is a great way to measure success or failure against your targets, address financial oversights within your company, and identify ways to improve your profit margin.
Tip #5: Eliminate Non-Essential Spending
One of the benefits of constantly monitoring your cash flow is being able to address your future cash flow needs. Constant monitoring gives you a goal to strive for and sets a target for better forecasting. In addition, constantly monitoring your cash flow statement helps to monitor and budget your collections as well as business costs.
Our team at Jones CPA Group can consult with you on how to improve your cash flow.
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