It’s no secret that projections are essential to effectively managing cash flow, providing you with the financial foresight you need to make more profitable business decisions. Even businesses that are not distressed find themselves struggling to sync their bill payment with incoming customer payments to remain in a favorable cash position. That being said, it is a good time to review the fundamentals of cash management to help keep those dollars flowing as your business improves.

Look at Your Budget

It’s hard to know how to improve your cash flow unless you can sit down and see precisely where your money is going. That’s why the first essential cash-flow analysis tool is your annual budget.

You’ll want to examine your budget line by line. Although maintaining a detailed budget for all company expenditures can be tedious, it’s fundamental to good cash-flow management. Your budget can facilitate expense tracking and help guide spending decisions to align with your business goals.

Items in your budget should tie into and support overall company business goals. If you can’t effectively demonstrate how an item enables a particular business goal, you should question its merit. This will help you avoid unnecessary spending and make more funds available for allocation to worthier business needs.

Also bear in mind that, for analysis purposes, a budget is useful only if you update it regularly to accurately reflect your actual spending. For instance, you may have overbudgeted or underbudgeted on some items and, thus, spent more or less than you anticipated.

Create a Cash-Flow Statement

With your budget as the foundation, work with your CPA to create a cash-flow statement. The purpose of this document is to report the net increase or decrease in cash for your business.

The statement factors in the cash inflows and outflows of daily business operations, asset purchases, sale proceeds and financing activities (loan payments and new borrowings). Because it excludes noncash accounting items, you can use it to pinpoint cash-flow problems.

If you want to get the most from your cash-flow statement, generating one monthly is best. Quarterly and annual statements can also be useful for identifying cash-flow trends. Accounting software packages can help automate and simplify the process of preparing these and other essential financial reports.

Manage Expenses

After securing an overview of your company’s cash flow, you can start examining specific areas. One in particular is expenses. Here, too, you should look to your records.

Maintaining accurate expense records gives a more complete view of your financial situation, putting you in a better position to effectively manage your company and ensure ongoing profitability. Accounting software can help you automate the meticulous process of expense account organization and records tracking.

As you review your expense data, seek out ways to reduce your company’s day-to-day operating expenses. For example, you may find it more economical to outsource noncore areas of the business such as human resources, payroll and benefits management or information technology support.

Or you might implement just-in-time inventory management, with suppliers maintaining inventory for your business as long as possible, saving you storage and interest costs.

Review Collections & Payables

Timing is critical when it comes to both the money coming in and going out. Conduct credit and reference checks on new customers to validate their payment histories and minimize the risk of collection problems.

Consider requiring customers to provide deposits on product orders or services to be rendered and offering discounts for paying invoices early.
Invoicing mistakes may also hurt your cash flow. Prevent invoicing errors and costly collection delays by maintaining current and accurate customer account data. Promptly send invoices to customers. Also, follow up quickly on past-due accounts. Don’t wait until accounts are 60 or 90 days late.

On the flipside, take a look at your payables. Generally, you shouldn’t pay invoices earlier than required unless you’re offered a discount. Use your buying power for large-volume and frequent purchases as leverage to negotiate discounts, free financing or extended payment terms.

Operate Within Your Means

When the economy presents challenges, a business is often best off focusing on its core strengths, cutting expenses and operating within its means. Doing so will help keep cash flow strong and lessen your dependency on outside parties, such as lenders, over which you have no control.

Doeren Mayhew’s Business Advisory Group helps businesses create budgets, project cash flow, monitor trends and more. For more information on cash-flow management and how to get started, contact us today.