How to Track and Manage Business Cash Flow

by | Aug 11, 2022

How to Track and Manage Business Cash Flow

by | Aug 11, 2022

If your business is struggling with cash flow, you are not alone. Small and medium businesses consider this particular financial metric one of their top 5 challenges. In fact, studies show a sizable portion of businesses fail due to cash flow issues. 

Cash flow is simply the movement of money in and out of your business. Positive cash flow means that more money is coming in than going out. Negative cash flow means that a company’s liquidity is decreasing.

Several things can impact your business’s positive or negative flow of cash. Things like seasonality, customer payments, and inventory levels are all factors. You need to be aware of these factors to manage your revenue and expenses effectively. 

Tracking your cash flow is important because it can give you a snapshot of the financial health of your business. It’s one of the most profound indicators of whether or not your business will be successful in the long run.

Our term in question is typically revealed in statement form (aka a cash flow statement), which shows you the sources (inflows) and uses of cash (outflows) for a specific period. As a business owner, you must monitor the flow of money into and out of your business to ensure that you have enough cash on hand to meet your obligations.

Do you know the health of your business, right now? Can your business ride out any dry periods where revenue might be low? Use this guide to help you track and manage your business cash flow so that you can make informed decisions about the future of your business.

How to Track Cash Flow

Cash flow tracking is perhaps one of the most important things you can do for your business, yet it is also one of the most commonly overlooked.

There are several ways to track.

Recognize the Value of Cash Flow

Most businesses fail to expand or get pushed out of the market due to liquidity problems. In other words, working to ensure you have more coming in than going out is the difference between staying open or not.

And it really is that simple, at first. Sure, business finance is a complicated topic, but it’s easy to understand the fundamentals enough for making informed decisions. 

Here are a few key things to keep in mind:

  • It’s important to track your cash flow so you can see where your money is coming from and going. This will help you make informed decisions about how to allocate your resources.
  • Your business is constantly changing, so it’s important to monitor your inflows and outflows closely. You may need to adjust your budget or make other changes to keep your business afloat during periods of tight cash.
  •  You can improve your business cash flow by increasing sales, reducing expenses, getting paid for overdue invoices, and managing inventory effectively.

The key? Intentionality and follow through. Use a cash flow statement or other financial tools to help you track your progress. Review your ins and outs regularly to ensure that your business is on track.

Monitor Your Business Cash Flow

Once you have a handle on your business cash flow, it’s important to monitor it regularly. This will help you spot potential problems and take action quickly.

Specific things to keep an eye on include:

  •  A sudden decrease in revenue: This could signal that something is wrong with your business. It could signify that you’re losing customers or that your prices are too high. Either way, it’s important to investigate any sudden decrease in revenue.
  • An increase in expenses: This could signify that you’re spending too much money or your costs are going up.
  •  An increase in accounts receivable: This could be a sign that your customers are taking longer to pay their invoices. This can lead to cash flow problems down the road.
  •  A decrease in accounts payable: This could be a sign that you’re not paying your bills on time, which can lead to late fees and other penalties.

Use a Tool to Keep Things Clean

A big part of managing business cash flow is keeping things organized. You need to have a system to track all the money coming in and going out of your business. This will help you identify any potential problems so you can take action to improve your cash flow.

There are several different ways to track cash flow. You can use a simple spreadsheet, accounting software, or a specialized cash flow management tool. Tools such as QuickBooks Online,  Xero, and FreshBooks offer features specifically designed to help you track and manage your cash flow.

While these tools may cost a bit more upfront, they can save you time and money in the long run by helping you keep track of your cash flow more effectively.

Choose the method that works best for you and your business. The important thing is to have a system in place to track your progress and make informed decisions about your business cash flow.

It’s also important to update your records regularly so you can see where your business stands at any given time. This will help you identify potential problems so you can take action early enough before it becomes a full-blown problem that eats into your profits.

If you have trouble setting up a system or keeping track of your records, consider hiring a tech-savvy bookkeeper or accountant to help you out. This can be a worthwhile investment that will help you keep your cash flow under control.

How to Manage Business Cash Flow

There are several things you can do to manage your business more effectively. Three key items include:

  • Monitor accounts receivable
  • Improve inventory/overhead management
  • Use a forecast to predict ups and downs

Now we’ll cover each more in depth.

Keep Close Tabs on Your Accounts Receivable

Most business owners get stuck in the mentality of selling, selling, and selling without ever stopping to think about when they will actually get paid. This can lead to big problems down the road if you’re not careful.

Make sure you keep close tabs on your accounts receivable. This means sending invoices as soon as the job is completed and following up with customers who are late on payments. You may even want to consider using a tool like InvoiceSherpa, Chaser, Debtor Daddy, Satago, or Zervant to automate the invoicing and collections process.

Automating your invoicing and collections process can save you a lot of time and hassle. It can also help you get paid faster, improving your cash flow. It also removes mundane tasks so you can focus on more important things, like growing your business and finding new customers. 

You should also have a clear policy in place for late payments, including: 

  • Introduce a late payment fee: Businesses that have mustered up the courage to institute a late payment fee have seen marked improvements in cash flow. Just make sure you communicate this policy to your customers upfront, so there are no surprises later on.
  • Offer Discounts for Early Payment: Offering discounts for early payment typically improves on-time payments.
  • Extend Payment Terms to Net 60 or 90: If you’re struggling to get paid on time, consider extending your accounts payable terms to net 60 or 90 (where possible). 
  • Automate follow ups: In addition to automating the invoicing process itself, include a system where you automatically send reminders a few days before it’s due and then updates the invoice with a late fee, sending more notices until the bill is paid.

Improve Your Inventory Management

You must be intentional about managing your inventory if you sell physical products. Too much inventory can tie up a lot of cash that could be used for other things. But if you don’t have enough inventory, you could miss out on sales.

It’s important to strike a balance with your inventory levels. You can do this by using a tool like inFlow Inventory, which can help you track your inventory levels and manage your stock.

You should also create an inventory budget so you know how much money you can afford to spend on inventory each month. This will help you stay on top of your inventory levels and improve your cash flow.

Use a Forecast

Being able to foresee where your revenue and expenses are headed is a great way to improve more than inflows and outflows. Cash flow forecasting allows you to see potential problems on the horizon so you proactively plan instead of react.

A forecast can be as simple as a spreadsheet that tracks your projected revenue and expenses for the next 12 months. Alternatively, you can use a tool like Float, which offers specialized cash flow forecasting features.

Whatever method you choose, make sure you update your forecast regularly so it always reflects your most recent data. 

What do you need to include in your forecast?

  • Your current bank balance and cash at hand:  This will give you a starting point for your cash flow forecast.
  • Your projected revenue: Include all sources of revenue, such as sales, grants, investments, etc.
  • Your projected expenses: Include all of your fixed and variable expenses, such as rent, salaries, inventory, marketing, etc.
  • Your net cash flow: This is your projected revenue minus your projected expenses. This will give you an idea of whether you’re expected to have positive or negative cash flow in the future.
  • Your break-even point: This is the point at which your revenue equals your expenses. Knowing your break-even point will help you make informed decisions about pricing, costs, and other factors.
  • Your cash flow projections for the next 12 months: This will give you a bird’s eye view of your expected cash flow for the year. 

Work with a Qualified Accounting Solution

Improving your business cash flow is essential to keeping your business afloat. But it’s important to find the right solution for your business. The tips and techniques in this article will help you get started.

But if you really want to take your cash flow management to the next level, you need to work with a qualified accounting solution. An accounting solution can help you automate your invoicing, payments, and other financial tasks. This will free up your time so you can focus on running your business.

A qualified accounting solution will also give you insights into your business. You’ll be able to see where your money is coming from and getting spent. This will help you make informed decisions about your business finances.

If you’re serious about improving your cash flow, contact us today to learn more about our accounting solutions

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