Every business, no matter its size, needs to have enough cash to pay the bills. Focusing solely on sales and profits could create issues when invoices arrive and you find that there aren’t enough funds available to pay them. Below are five ways you can be proactive and improve cash management for your business:

1. Create a cash flow statement and analyze it monthly. The primary objective of a cash flow statement is to help you budget for future periods and identify potential financial problems before they get out of hand. This doesn’t have to be a complicated procedure. Simply prepare a schedule that shows the cash balance at the beginning of the month and add cash you receive (from things like cash sales, collections on receivables, and asset dispositions). Then, subtract cash you spend to calculate the ending cash balance. If your cash balance is decreasing month to month, you have negative cash flow and you may need to make adjustments to your operations. If it’s climbing, your cash flow is positive.

Note that once you have a cash flow statement that works for you, you can automate the report in your accounting software. Or, you can create a more traditional cash flow statement that begins with your net income, then make adjustments for non-cash items and changes in your balance sheet accounts.

2. Create a history of your cash flow. Build a cash flow history by using historical financial records over the course of the past few of years. This will help you discover if there is a particular time of year which needs more attention.

3. Forecast your cash flow needs. Use your historic cash flow and project the next 12 to 24 months. This process will help identify how much excess cash is required in the good months to cover payroll costs and other expenses during the low-cash months. To smooth out cash flow, you might consider establishing a line of credit that can be paid back as cash becomes available.

4. Implement ideas to improve cash flow. Now that you know your cash needs, consider ideas to help improve your cash position. For example:

• Reduce the lag time between shipping and invoicing.
• Re-examine credit and collection policies.
• Consider offering discounts for early payment.
• Charge interest on delinquent balances.
• Convert excess and unsold inventory back into cash.

5. Manage your growth. Be cautious when expanding into new markets, developing new product lines, hiring employees, or ramping up your marketing budget. All of these activities require cash and you don’t want to travel too far down that road before generating accurate cash forecasts.

Understanding cash flow needs is one of the key success factors in any business. If you are in need of tighter cash management practices, contact Cray Kaiser and we’d be happy to help you.