5 Tips for Maintaining a Positive Cash-Flow

Counterattack a negative balance by avoiding these common pitfalls.

When you hear the term “cash flow positive” you may assume it means the same thing as profitability. While the two terms are related, they are not the same thing. Your business can be profitable without being cash flow positive, and vice versa.

“Cash flow” refers to the total amount of cash going in and out of your business. To be cash flow positive, you need more money coming in than going out at any given time.

Profitability is more of the big picture. A profit is what is left over after all expenses are paid.

Confused? Let’s look at an example:

Let’s pretend you are a small business owner whose sales volume in one month totaled $5,000. Your estimated costs (rent, payroll, materials, etc) were $3,600. Congratulations, you’re profitable!

(Applying the above example to the profit formula: 5000-3600 = 1400)

Profit is great, you’re feeling great, but there is more to consider. You sent one of your customers an invoice for sales, and they have yet to remit payment. By the end of the month, you have a cash inflow of $3,000, with $2,000 in outstanding receivables. That means that you had expenses of $600 more than your actual incoming cash flow of $3,000.

Spending $600 more than what came in for one month may not seem like a big deal. However, what if this continued for 4 months, or 8 months in a row? That is potentially a negative cash flow of $4,800 over an 8 month period. For a business this size, that is a problem.

You may be thinking, but I know the cash will eventually even out because my client always pays what’s due. While this may be true, remember that your monthly expenses are due now and are not going to wait around for those invoices to be paid. Even if your business looks profitable, if you can’t cover your current expenses, your business might not make it.

Now you may be asking “What can I do to keep a positive cash flow?” Let’s take a look at a few quick tips that you can implement now. 

1.       Maintain a cushion

The first, and arguably most important, step to positive cash flow is being prepared for the worst. If you do happen to have a negative cash flow one month, having a cushion to fall back on could be what separates your success from your failure. Most accountants will suggest having one month’s operating expenses in savings to cover any unexpected loss of income or increase in expenses. A good idea is to set up an alert system with your accountant or accounting method which will inform you of any expenses that dip into this emergency account.

2.       Look for alternative sources of income

Some businesses may benefit from utilizing a dual-purpose asset that can bring in additional cash during slow months. For example, a seasonal pumpkin patch business can benefit from off-season venue rentals to increase yearly revenue.

Another option is opening a line of credit. If you decide to take this route, it is important to remember it is debt and it should only be used in emergency situations. However, opening a line of credit when business is good can not only help you be prepared, but can increase your business’s credit and reputability.

3.        Stay on top of receivables

One of the biggest cash flow challenges for any business is accounts receivable. If you are not proactive on collecting payments from your clients, your business could quickly fall to a dangerous cash flow situation. There are a few basic things you can do to increase your chances of getting paid faster.

First, review your invoicing process. If you are still printing and mailing physical invoices, you are inherently creating additional time before your invoice is processed and paid by your client. Going digital can significantly reduce this processing time and allow you to instantly receive invoice payments.

Second, stick to short payment periods. The recommended due date should be no longer than 30 days post invoice date. If you are allowing 60 or 90 days for payments, this will directly affect your short-term cash flow.

Third, follow up on late invoices. You should send prompt reminders to at 30, 45, and 60 days. Consider adding late-payment penalties and early-payment discounts to encourage your clients to pay on time.

4.        Keep a close eye on expenses

Remember there are two sides to a positive cash flow: money in and money out. Keeping a close eye on your expenses is just as important as making sure your incoming cash keeps flowing. Working closely with a proactive bookkeeper can help you monitor your cash flow and determine whether spending $2,000 on a new computer system for your office is a good idea. Resisting the urge to spend money upfront is one of the most important lessons you can learn as a business owner. Remember you want a viable business that will be around for the foreseeable future and focus your spending habits on your long-term goals.

5.       Avoid fees

Avoiding unnecessary fees should be a no-brainer for any business owner. In the real world, we know that things happen. An invoice due gets pushed to the back of your mind and before you know it, it’s late and you now owe a $35 late fee. Staying on top of your bills and paying on time not only saves your business money on late fees but increases your credibility and could potentially allow you to take advantage of early payment discounts. Aside from utilizing a great accounting team, setting up automatic payments can ensure those bills are paid even if they slip your mind.

Another costly mistake business owners make is delaying tax payments. Having a responsible accounting team can help you stay organized and prepared come tax time to keep you from feeling the need to apply for extensions and incur additional fees from the tax man.

Creating a cash-flow positive business structure is not an overnight process; it takes work. If you create a plan, keep yourself in check, and make corrections as needed, you’ll find you have created a well-oiled machine that can navigate through almost any detour.

So, go on, get started! Talk to your accounting team today about creating a positive cash flow business.

Schedule a quick chat with us at www.wisebookkeeper.com for a free consultation.