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Cash Flow Management Best Practices

More than 75% of small businesses fail as a result of cash flow problems. Managing incoming payments and outgoing expenses lies at the heart of operating a financially healthy business, and optimizing cash flow management is key to success. In this article, we will review cash flow management best practices to keep in mind. 

What is cash flow management? 

Cashflow management is a business practice of monitoring the inflow and outflow of cash. This is different than profitability—with cash flow, you are ensuring that your business has the necessary funds to pay obligations when they arise. Note that it is possible to have a cash flow problem while being profitable

Cash inflow is the money coming into the business by way of sales, earned interest, or investments. Cash outflow is the money leaving the business through bills, rent, inventory expenses, payroll, etc. Cash flow from operating activities is the money your business spends carrying out its operations during a set period of time. 

Tips for managing cash flow

  1. Inventory control
    Analyze your sales history and aim to stock only the products and inventory that sell quickly so that you don’t have too much dead stock in your business. Sinking funds into items that don’t sell can deplete your account, making it hard to cover essential expenses. 
  2. Evaluate the option to lease
    When it comes to equipment or technology, there is typically the option to either purchase the asset or lease it. Choosing to lease rather than buy can help the cash flow for your business by dispersing smaller payments over time, rather than using up significant resources for one large purchase that will depreciate in value over time. 
  3. Use software to manage your finances 
    Avoid manually tracking any of your business financials, as this can be time consuming and leaves you vulnerable to human error. Most software will have a cash flow statement template that can automatically populate with data so you can quickly see where your business stands.
  4. Improve your accounts payable methods
    As an extension of number three, it can help to optimize your accounts payable and set up a schedule so that you don’t wind up delaying payments, only to owe massive sums all at once, which can then suddenly deplete your account. 

  5. Increase revenue 
    This may seem like a no-brainer, but finding new revenue streams expands your opportunity to make money outside of your main business model. This could mean offering online promotions, adding additional services, subscriptions, or bundles. Just make sure that in your attempt to increase revenue, you don’t increase expenses by too large of a margin or else you will remain in the same cash flow situation. 

What are the benefits of optimizing cash flow management? 

When a cash flow problem exists in your business, it can cause stress and can be a driving factor when small businesses are forced to shut down. By optimizing your invoice management, you will improve your business longevity, ability to plan, opportunities to grow, and ability to work within a budget. Our automated invoice management platform is revolutionizing payments, making it easier to manage your business finances. Learn more about Modern Receivable, or sign up today in just five minutes.