The 5 best practices for cash flow management
“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.” – Michael Dell
You’ve probably heard the expression “Cash is king”. There is a reason it gets used over and over in business conversation. The age old truth is that cash flow is the lifeblood of business, and without good cash management, your business could be at risk. We have been doing cash flow management for our clients for a long time, and have identified 5 best practices for your company to consider.
1. Understand it / Track it – The most important thing every entrepreneur should understand about cash flow is this: Profit doesn’t equal cash flow. I wrote a blog on this topic to explain it in more detail (click here to read), but it is critically important for every business owner to have a good understanding of the basics of cash flow. Cash flow is fundamentally different from profit. If you are only looking at your profit and loss statement, you run the risk of running out of cash. I recommend using a 13-week rolling cash flow forecast to track it and create the visibility you need.
2. Minimize or eliminate credit – The business world is moving away from credit. Most savvy business owners are looking for ways to eliminate receivables or cut down on payment cycles. Challenge the status quo and explore whether you can change your payment terms to start requiring e-checks (electronic bank to bank payments) instead of extending credit. If your products or services are good enough, you may just be able to change the rules of the game. Eliminating or minimizing credit creates a permanent pickup in cash and can make a massive difference for your business.
If you operate in an industry that demands credit terms, you can still take measures to improve your cash flow. The first thing you need to do is set the expectation both internally and externally that you won’t allow debtors to slide. Establish a tight process for invoicing and collecting and be diligent in your collection efforts. Vendors that communicate proactively with their customers and set clear expectations tend to get paid on time.
3. Increase sales not expenses – A common trap that business owners often fall into is buying into the idea that all growth is good. Profitable growth is good. If you are aggressively growing your expenses at the same time you are growing your sales, you may not be creating positive cash flow. In fact, you may be creating negative cash flow. To maximize cash flow, you should look for ways to acquire new customers, up-sell existing customers, or increase your average sale per customer, while minimizing the related expenses. It is easier said than done, but worth the effort to explore creative ways to keep your expenses under control.
4. Manage your payables – This is where I talk out of both sides of my mouth. I mentioned earlier that the business world is going away from credit. That doesn’t mean that you shouldn’t take advantage of credit terms whenever possible. When you turn the tables and you are the customer, you should do everything you can to extend your payables. Whether you are making large purchases or negotiating with your high volume vendors, you should push for extended payment terms.
My final point on this topic may seem obvious, but you would be surprised how often I see it. Don’t pay early. It is often a source of pride for business owners to pay a bill as soon as they get it. While it may feel good, it is not good cash management. Take advantage of the payment terms and only pay your bills when they are due.
5. Use the right tools – When you have the right tools to do any job, it makes your life easier and increases your chances for success. It is no different for cash flow management. It all starts with your accounting system. If you are not on a cloud-based accounting system like QuickBooks Online, you are putting yourself at a disadvantage. There are some really good business apps that plug into QuickBooks Online (and other cloud-based accounting platforms) that will increase efficiency and cut down on the potential for things to slip through the cracks. When it comes to good cash flow management, it is important to have the right foundation. Milestone recently published a white paper on The 8 Best-in-Class Accounting Apps You Should be Using that will be a helpful reference.
There is one tool in particular I want to highlight in this section that has been a real game-changer for us as we prepare cash flow forecasts for our clients. Like most accountants, we used spreadsheets for cash flow forecasting for years. Recently we switched to a software tool called CashFlowTool and never looked back. CashFlowTool is the best-in-class cash flow forecasting tool on the market. You can see your historical cash flow for the last 12 months, as well as project future cash flows by line item. It also syncs with QuickBooks Online to eliminate data entry, improve accuracy, and streamline the entire forecasting process. In today’s fast-paced world, a spreadsheet is not good enough.
At Milestone, we are cash flow experts. Whether you are trying to confidently forecast your cash flow, or you are looking to implement best practices for cash flow management, our outsourced accounting services are designed for you.
Give us a call at 317-810-0165 or email us at [email protected].
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