Seven Major Steps for Good Cash Flow Management
By Kellé Thorpe, fractional CFO of Kommas With Kellé and member of NAWBO Greater DC
As a small business owner, you need to be involved in consistent monitoring of your cash flow more than anything else. Whether it’s weekly or monthly, you need to be on top of your cash flow.
Checking your financial statements and transactions gives you insight into your income levels and whatever is moving out of your business. If the numbers indicate more income than spending, then you’re doing great. If the reverse is the case, then you need to watch out.
If your cash flow management has not been the best, check out these seven major steps for good cash flow management:
#1 – Regularly Conduct Cash Flow Analysis: The first step to good cash flow management is to frequently conduct cash flow analysis. This will help you establish where your business stands in terms of finances. Online accounting software is available, making things easier for you. You can generate reports and statements, reconcile accounts and much more from the comfort of your office. In the cloud, your financial information is secure, and no matter your location, you can easily monitor your cash flow.
#2 – Cut Unnecessary Expenses: If your expenses exceed your income, that should raise a red flag. Making cuts can be challenging for any business. However, if you can identify priority areas, it’s easy to spot the places to reduce spending. Of course, there are things you cannot touch. On the other hand, some things will require a change of approach to reduce expenditure. Some changes to consider include:
- Are there services or subscriptions you can stop paying for?
- Are there insurances you no longer need?
- Do you have any leases or loans that could be renegotiated?
#3 – Create Good Credit Control Procedures: What do your credit control procedures look like? This should include establishing payment terms and communicating them to your buyers, not only during sale interactions but formally in your paperwork, too. In addition, put in place procedures defining the way forward for overdue invoices.
#4 – Cash In on Assets: It does not make sense to keep assets that are no longer of use to your business. It’s better to sell the equipment, machinery and tools that are dormant. Also, don’t leave behind any inventory that’s already obsolete. Selling these assets will generate some quick cash you can use to boost your business.
#5 – Stay on Top of Invoicing: There’s no need to wait until after you deliver products or have completed work before making the invoice available to your customers. Instead, send the invoice immediately. Know who you need to send the invoice to and all their address details to avoid stressing them as they move from one department to another. Don’t confuse your customers by designing your invoices in a complicated format. Make them easy to read and understand. The payment details should be direct. To make invoicing smoother and more efficient, consider emailing them to customers instead of sending them via mail.
#6 – Have a Cash Reserve in Place for Emergencies: An emergency fund is an excellent cash flow management practice. Setting aside enough cash to cater for a couple of months’ expenses prepares you for unpredictable eventualities. In fact, this is not only good for businesses, but individuals as well. The COVID-19 pandemic is a perfect example of how things can take a turn, and at such times, only businesses with good cash flow management strategies can stand the test of time. Granted, contributing to a cash reserve has its challenges, and most businesses don’t manage to do so. But a saving habit and culture when your income is doing well will go a long way when things take a turn.
#7 – Request for Deposits: The plausibility to request deposits depends on the type of business you operate. If you get a large order on a product or a long-term contract to deliver a service, you can ask for a partial payment or deposit. You can request a percentage of the total cost before beginning the work. Then, you can get half of the remainder after starting the work and the rest at the end of the project. That way, you get enough cash to keep running the project. In any case, you need money for materials and paying workers.
These steps are crucial if your business is to have a good cash flow.
About the Author…
Kellé Thorpe, fractional CFO with Kommas With Kellé in Woodbridge, Virginia, launched her business in 2020 under the name Assemblage LLC, which is now their parent company. With Kellé’s over 20 years of expertise and strategic approach, they quickly catapulted into a profitable multi-six-figure firm in the first year, during the pandemic and without burnout! Learn more about Kommas With Kellé here.