Cash flow is a hot topic for small businesses. Business owners need to closely manage their cash requirements on a daily, weekly, and monthly basis. Having a handle on your monthly overhead and getting paid as quickly as possible are two of the most important steps to ensure cash is there when you need it. The following are key tips to better manage cash flow.
1.Do you know your average monthly expenses?
Expenses can fluctuate on a monthly basis, but over time you can determine an average amount of cash that will be required to cover your overhead in any given month. Determining a monthly “nut” or “run rate” gives you a number to keep in mind when looking at your bank balance, outstanding A/R, and outstanding bills. Add up your expenses for the last 12 months and divide by 12. This is your average monthly overhead, which should always be kept in mind when reviewing how much cash is available and your spending plans.
2.Are you getting paid as quickly as possible?
The internet and cloud technology has brought us faster methods of invoicing customers and getting paid. It is no longer necessary to wait for checks to arrive in the mail. Your customers don’t want to write checks anymore either, so make sure you are enabling online payment options such as PayPal, credit cards, or bank debit.
Are you providing a recurring monthly service to a customer? Then put them on an automatic bank draft program. You might even consider giving them a small discount for agreeing to the terms. You are saving time managing the outstanding A/R and it will improve your cash flow significantly.
3.Evaluate speed versus cost of your merchant services accounts
Everyday I hear about a new merchant services provider. Some have high setup fees and low transaction costs. Others have no setup fee, but very high transaction costs. There are also variations in the actual services offered. At the end of the day, the choice should be based your specific business needs. When evaluating the various services and fee structures you should always assess the speed in which the cash is deposited into your account versus the fees. Many services provide low fees, but hang up your payments for a week. You must keep the fees reasonable, but always make sure you are getting your money as fast as possible.
4.Keep Personal Spending Out
Co-mingling business and personal expenses has ramifications beyond this discussion. From a cash flow perspective, it makes it very hard to manage the income, expenses, and cash balances of the business if you are constantly charging personal expenses on your business card. For business owners not on salary, determine a monthly draw that will cover personal expenses and move the money out on a set schedule each month. Budget the draw amount each month as part of your monthly cash requirement and there will be no surprises.
5.Pay Taxes through the Year
For most small business owners, tax liabilities are co-mingled between your business and personal finances. If you are on salary, taxes are taken care of with each paycheck. If you are not on salary, your income tax and payroll tax liabilities are adding up every time you receive payment from a customer.
You cannot claim surprise on April 15th when you owe taxes. If you make money, you have to pay something. Didn’t you always pay taxes before you were a business owner? The solution is to review your income and tax liability on a quarterly basis and pay as you go. The goal is to owe nothing on April 15th.
Nothing hurts cash flow more than having to write a huge check to Uncle Sam in April. Smaller, manageable payments through the year will keep your cash flow and tax liabilities in check.
Following these tips and paying attention to your spending will help you manage your hard earned cash. We are here to help with any of the ideas above.