5 Ways to Manage Cash Flow – and Increase Profitability
It’s no secret that cash flow management is an unmitigated pain. It can challenge even the most seasoned business owners. So it’s a no brainer that understanding and controlling the intake and outflow of money ensures that a company remains financially healthy.
Cash flow complexity stems from the misconception that positive cash flow – when more money is coming in rather than leaving - translates to profit. Extra money in the bank means that your company is flushed with cash, right?
Well, not always.
While there may be money in the bank, a certain amount of it is probably earmarked for payroll, rent, bills and more – meaning that money is not pure profit. If you fail to account for necessary payments the result can be a negative cash flow — when more money is leaving the organization than coming in.
Positive and negative cash flow will affect all businesses. There’s no avoiding it. However, there are ways that you can manage your cash flow in a way that can increase profitability.
Here are the five steps to accomplish this.
How to Manage Cash Flow
Understand your company’s financial performance. It’s the only way to create profit opportunities through cash flow. Take a trip down AP and AR memory lane, and look for any repetitive cycles or common actions that affect cash flow. Were there times during those years when less money came in? Are there significant, regular expenses once or twice a year that you should account for? Do you have to hire more talent for certain times of the year, like holidays or Arbor day?
This knowledge enforces the “big picture” of cash flow. You’ll learn what to prepare for and what to expect.
A simple, helpful solution is to adopt a heavyweight accounting software like Intuit QuickBooks Online or Xero. These solutions act as your financial dashboard, tracking everything from AP, AR, cash flow and more, and consolidate it into one platform. All the information you need is at your fingertips. With that kind of flexibility, there’s no excuse not to access your accounting solution every day and monitor your cash flow regularly.
Budgeting — it seems simple. However, not all businesses create and deploy budgets. And others that do, might not follow them stringently.
Since monitoring has allowed you to understand the ebb and flow of your cash flow, set a business budget each year. It’s perfect for cash flow management and enables you to save money during those positive and negative times.
In order to bring money in, you’ve got to send out invoices regularly and on-time. With — you guessed it — a cloud-based solution! One that can help automate invoices and send them electronically. This will save you an inordinate amount of time. Imagine a life where you don’t spend your valuable time creating, mailing, receiving, and processing invoices. It’s a beautiful dream.
4. Collecting Payment
Your customer has the invoice, now what? How will they pay? Well, you can help with that. Make sure you accept multiple forms of payment — preferably online. You just saved time on invoices, you don’t want to wait for a paper check to be reviewed, approved, cut, signed, and mailed.
An online invoice gives your customers the option to pick their preferred payment form. Whether it’s PayPal, ACH, or credit card, they can submit their payment right away. If you can, offer your customers the ability to auto-pay. That way, whenever the payment is due, that money is easily collected and waiting in your bank account.
We all love a good discount. We know that the 20% off coupon from Bed Bath & Beyond sends a shiver down your spine. And the easiest way to encourage customers to pay sooner? Offer discounts to those that pay ahead of time, in bulk, or by a particular date. But be cautious — if you discount too often or too deeply this tactic may cause unwanted headaches.
Take these five steps and lean in towards automation, online payments, and successful cash flow management. Remember, increasing profitability isn’t a trend, it’s a strategy.