A key piece of financial management for your business involves paying close attention to your cash flow. Having positive cash flow means having more cash coming in from sales and investments than going out in bills and business expenses. Managing cash flow isn’t always easy, though. It takes focus and planning.
To that end, we've put together this handy guide to help you with your end-to-end cash flow management. In this guide you'll find articles that dive into:
In the meantime, here are some high-level tips to help you manage your businesses' cash flow from day-to-day.
Follow these steps and you’ll be well on your way to optimizing cash flow and ensuring the financial health of your business.
To succeed in a competitive business climate, both the business owner and the entire company must regularly monitor a business's cash flow. If your business has poor cash flow, you’ll have to pivot to improve your business financing.
The equation is simple. Cash inflows from sales, investments, or other sources are offset by cash outflows such as payroll, marketing expenses, and other capital expenditures. Cash is king for many large or small business owners, and entrepreneurs running startups. According to Harvard Business School: “Having an excess of cash allows the company to reinvest in itself and its shareholders, settle debt payments, and find new ways to grow the business.”
A positive cash flow ensures that all bills can be paid and that business operations continue without interruption. That said, your business can be profitable without being cash flow positive; conversely, you can have positive cash flow without being profitable.
Maintaining a positive cash flow can be a challenge, but it’s necessary. To begin, project your business’ capital requirements and then conduct some basic cash flow analysis by monitoring the amount of cash coming in and going out. It also helps to have the right business financial tools to monitor these metrics. With automated accounting processes on hand, you can gain real-time visibility on your influx and outflow of cash, identify any spending issues, stick to your budget, and understand your business’ performance.
To improve your cash flow, you need to streamline the invoicing and accounts receivables processes. In short, your goal is to encourage your clients to pay you faster.
For starters, send out invoices immediately after the current billing cycle closes. This gives clients more time to send their payments. The best-case scenario is to not charge via invoicing that’s paid 30-60 days after a service is rendered (which is essentially just a line of credit). Instead, ask clients to make payments via credit card upfront or by direct debit as part of your payment terms. To further optimize this process:
Anything you can do to increase the speed at which you receive revenue, the better. The more quickly you receive payment, the more money you’ll have on hand to use as needed.
On the flip side, it’s also critical that you’re monitoring when you pay out vendors. By spreading out your vendor payment dates, you can ensure you’re not paying everyone at the same time each month. This allows you to avoid having a sudden massive cash outflow.
When it comes to cash flow management, monitoring your expenses is critical so you can cut unnecessary operational costs for your business. Even if you have massive sales, you can’t let operating expenses get out of hand. Otherwise, if a market shock occurs or costs grow exponentially, you could run into cash flow problems.
To identify areas of spending that can be cut, start by evaluating each department by ROI. From there, turn to hiring practices—are you only hiring when necessary? Once you’ve identified the clear-cut places to reduce costs, consider the less obvious ways a business can improve their long- and short-term cash flow, such as:
Additionally, expense automation can offer high-level and low-level analysis of your various expenses, allowing you to zoom in on where your cash is going on your balance sheet. This makes it easier to control and direct your healthy cash flow toward ROI positive channels.
All businesses rely on equipment and capital assets to operate. But for some companies, it may be more cost-effective to lease or rent the equipment instead of sinking significant capital investments. In addition to the initial purchasing cost, machinery and equipment typically require ongoing repairs, upkeep, and maintenance.
Sinking a significant portion of your budget into expensive equipment may not be worth it at the moment. Leasing the equipment instead offers flexibility to the business. It gives you the freedom to periodically reevaluate your cash flow and budget to determine whether the lease is providing ROI.
Depending on the numbers, you can either continue leasing or purchase outright accordingly.
Managing customer and vendor relationships is one of the most important tasks for any business. By building and maintaining healthy relationships, you can minimize negative cash flow and help ensure reliable sales.
The cornerstone of customer relationship management ultimately comes down to frequent communication and delivering results. Per Marshall Freeman: “With trust, you generally acquire loyalty between you and your customer. This can be crucial when you experience late payments, as customers are generally more encouraged to make payment on time if they have a strong relationship with a vendor or key contact they deal with on a day to day basis.”
Developing great business relationships with clients, vendors, and lenders not only helps your business grow, but in times of tight cash flow, they’ll likely be much more willing to work with you. Also, for vendors, they may be more amenable to discounts, which could reduce your overhead.
In the past, keeping tabs on cash flows involved manual accounting-based processes. These were time-consuming, error-prone, and tended to cause frustration for those employees charged with the rote tasks. But monitoring the ledger and managing cash flow doesn’t need to be a demanding process.
Expense management and accounting software can help you create cash flow statements and monitor your cash flow in real-time, allowing you to make better, more informed financial decisions. Automation can support invoicing, budgeting, and auditing. This allows you to not only monitor your spend in real-time, but also predict recurring expenses to forecast your spend.
When it comes to managing payments, your corporate card may be able to assist. Ideally, you want a card that helps you manage your expenses in real-time. This increased oversight and visibility over your expenses can help you better understand whether you have enough cash, where your cash is going, where it’s coming from, and where it could best be utilized.
In addition to high limits and automatic cash back on payments, your corporate card can increase your cash flow flexibility, giving you the ability to receive a temporary cash float if you find yourself momentarily strapped for cash.
With the right smart card, it becomes much easier to monitor, control, and limit your company spend.
Staying on top of your cash flow can be tricky at first, but with practice (and automation) it will become easier.
Ramp is a smart charge card with an integrated, real-time expense management platform that helps you manage a cash flow strategy with ease. You can know your cash balance and stay on top of your cash projections on a daily basis. Plus, our card offers 1.5% cash back on everything you spend that applies directly to the next billing cycle.