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Learning to Manage Cash Flow for Your Small Business

Cash Flow

Cash is like oxygen for your business — good cash flow keeps it healthy and fit. You need it to pay employees, buy inventory, obtain raw materials, take care of the rent, and even keep the lights on. Controlling cash flow is critical in helping you grow steadily over time so it’s in your best interest to improve your operating efficiency.

Here are the top five cash flow management techniques for your small business.

1. Stretch Out Payables

Stretching out payables can help you garner more working capital. The key is to designate one financial executive who can monitor internal and external data to see where you can stretch out payables without upsetting vendors. This employee should focus on approaching vendors on an individual basis. Depending on the leverage the vendor has, you can successfully negotiate payment terms and accept later payments. Avoid beginning the discussion based on price alone. Include other elements, such as allowances, delivery costs and vendor discounts, in the conversation.

2. Get Paid Faster

One simple way to improve small business cash flow management is to get paid sooner. Your customers will pay you faster if you give them incentives and alternative payment methods, such as ACH, credit cards or PayPal. Positive incentives will encourage clients to pay you early. For example, you might provide a small discount if they pay within a designated early time period.

ACH payments go through a secure network that clears payments between financial institutions. Accepting ACH payments is faster than paper checks, and ACH e-payments are more secure, save resources and reduce errors. Adding credit cards to your payment options helps you shift receivables to the financial institutions that issue the cards. Your customer's credit-worthiness is already established by the issuing banks. PayPal is faster than checks and lets you create invoices, and clients do not need a PayPal account to send payments. More options for your customers means faster payment for you.

3. Cash Reserves

Maintain enough cash reserves to cover down months in your annual sales cycle. A good rule of thumb is to keep three to six months of cash set aside to handle unforeseen expenses that invariably crop up. This may not be practical if you are in early stage company or startup, but it's a good goal to set as your company grows.

4. Anticipate Future Needs

Many business owners spend their days concentrating on gaining more customers, building sales and improving profits. But you can register profits without having any cash in the bank. Anticipate your future cash flow by performing periodic forecasting. The trick is to anticipate the timing of the ebb and flow of your company's cash.

5. Implement Cash Flow Tools

Services such as Bill.com, QuickBooks online, and Xero provide tools for small businesses to manage cash flow. For example, Xero offers an add-on called Float that provides cash flow forecasting. And Bill.com offers a cash forecasting tool that helps you project cash flow over the next 90 days, allowing you to detect cash issues early and take appropriate action.

Cash flow is the lifeblood of your business. It's not unheard of for growing companies to see a rapid influx of new business, but be unable to pay its bills. Use these cash flow management strategies to improve your forecasting and keep your business healthy.