Feb 15, 2022
Written by Bittany Fisher of financiallywell.info.
For small business owners determined to keep their company strong and thriving, maintaining a regular cash flow is essential. In fact, cash flow issues are frequently named as a top reason why small businesses fail. So understanding what cash flow is, and how to keep it healthy, can give any entrepreneur an edge. Before launching your startup, make sure you are well versed not only in the fundamentals of cash flow management, but also in how to detect and prevent potential problems before they become serious. Here, the Association for Financial Professionals of Western New York explains how.
Why cash flow is so important
Cash flow has to do with the amount of money that is flowing in, versus that which is flowing out. Clearly, if more is flowing out than in, you have a problem. This is the case even if you anticipate a significant influx in the future. Lack of cash on hand to deal with immediate needs such as paying employees as expected or taking care of utilities can weaken your company in a number of ways. Over time, repeated cash flow problems will harm your company so much it may collapse. This is why you need to consider your company’s financial well-being not only in terms of overall profits, but according to regular cash flow, on a month-by-month basis.
Primary reasons for poor cash flow
There are a number of reasons why your cash flow may be inadequate. One common reason is clients making late payments. Unfortunately, customers often behave as though they can make small business owners wait on payments. But if money you are owed is delayed, even by a few months, this can put your business in jeopardy. Another reason why cash flow might slow down is if you run into issues with your business taxes, or if you make mistakes with your accounts, and end up having to pay more than you anticipated. And of course, insufficient profits overall will leave you with inadequate cash flow.
How to get your customers to pay on time
One way to expedite payments from your customers is to insist on a deposit from the very beginning, and then have them pay in increments as you achieve project milestones, and not in one lump sum at the end. It can also be helpful to create automated bill-pay reminders that will prompt your customers to pay, without you having to get involved and remind them personally. Having diverse options for payment is also wise. Many clients will find it easier to pay on time if you give them the option of using online payment methods. Bear in mind, however, that it’s critical to make sure your customers’ data remains safe and secure for these transactions. To ensure this, use a third-party site to create a bank account verification API when setting up your payment system. This adds additional security and an extra layer of protection for you both.
How to stay on top of your taxes
The single best thing you can do to keep your books in good order and avoid costly errors in filing is to hire an accounting professional. It’s also a good idea to use tax software so everything is in order, and you don’t have to scramble to find important records at tax time. Maintaining good accounts also means staying on top of payroll, and making sure the outflow there is balanced against a healthy inflow. Look for a reliable payroll system that offers automatic scheduling, takes care of your deductions, and calculates and files for you. If you are running your business from a smartphone, make sure this and any other software you rely on come with a mobile app version. This way you can monitor your payroll at all times, so you can catch any cash flow problems in this area before they become serious.
Go back to school
Speaking of taxes, you may discover that you’d rather handle this aspect of your business on your own. You could go back to school and pick up accounting courses to help you strengthen your abilities in this department. Thankfully, going back is pretty easy these days, thanks to online universities that allow you to set your own schedule. What’s more, these opportunities are often more affordable and flexible than traditional colleges. Having a better understanding of taxes, as well as taking a more hands-on approach to your business’s finances, can help you get in front of any cash flow problems before they become serious issues.
A successful business needs a healthy cash flow. Keep an eye on your finances at all times to watch out for red flags in any of the above areas so you can apply fixes sooner rather than later.
The Association for Financial Professionals of Western NY is a non-profit, educationally-oriented organization that provides a forum for the active and open exchange of concepts and techniques related to the practice of financial management. Contact us today!