Whether you want to grow your business, invest in new equipment or hire a consultant, you may be able to find the funds you need for expansion by taking better control of various aspects of your cash flow in the here and now. And automation may be the most effective way to achieve that control.
To establish an understanding of how much cash you will have on hand to run your business at any given time — a fundamental element of managing your flow — accurate forecasting is key.
“In many cases, business owners are so busy in their daily grind dealing with the current moment that they don’t take the time to focus one, two, three months down the road,” says Joseph Romano, CPA and president of Romano & Associates in New York City. “If this is the case, owners can automate forecasting by implementing QuickBooks or other accounting software.”
These platforms not only help you manage the day-to-day invoicing, income management and cost tracking, but they can use your accounts receivable and payable data over a period of time to help you forecast and budget income and expenses. They also can help ensure you’re properly billing and collecting.
QuickBooks by Intuit is the most widely known accounting software, and they do have an online platform specifically for small businesses. However, there are alternatives, such as Xero and AccountEdge, that can accomplish the same tasks. While it is possible to integrate customer service apps and customer relationship management (CRM) software with your accounting program, Zoho actually offers an all-in-one solution. This type of integration ties sales data and client information with the accounting operational data so you can measure how well your business is tracking against your forecast in real-time.
Once you have an accounting system in place, here are several ways you can maximize your cash flow and plan for growth or investment in your business.
Generate a cash flow statement
A cash flow statement tracks the inflow and outflow of cash resulting from operating, investing and financing activities during any given time period. These statements can provide you with a fairly clear picture of your business’ ability to finance growth.
Cash flow statements can help you identify cash flow drivers by comparing the current and prior accounting periods in detail. Once you identify the key cash drivers for your company’s operations and understand how the current period—month, quarter or year—compares to a prior period, you can plan a reasonable time for purchases and investments without seeking a loan.
Shorten the collections cycle
“Collections is another big issue for small businesses,” says Romano. “A company may have large sums of outstanding receivables and aren’t always on top of it.”
The process of shortening your pay cycles starts with proper invoicing, and your accounting software can help with that. The quicker you invoice, the quicker you will get paid. You can set up regular invoicing cycles so bills are automatically sent out and are not dependent on you or your employees to check that task off the to-do list. Make sure your invoices highlight clear payment terms.
One of the most important factors in getting paid quickly is to send the invoice to the correct person and ensure his or her contact information is accurate. The person who places the order may not be the one responsible for paying the bill. As part of your sales process, you and your employees should ask for payment contact information upfront to avoid confusion and delays when it is time to collect.
You can also schedule automatic payment reminders to your customers. If a payment isn’t received and entered into the software, the customer will automatically receive an email requesting payment. If you accept credit cards or direct bank payments, include a link that allows customers to submit their payments online. Automated payments can dramatically quicken your cash collections process.
Create a cash safety net
To avoid a cash crunch, Romano suggests getting a line of credit when you least need it. “No bank will give you money when you do need it,” he says. “When you’ve had a few tough months, and your profit and loss statement and balance sheet look bad, everyone is going to turn their back on you when you try to get a loan at that point. When businesses don’t plan ahead and they run into a problem, they tap into credit cards, hard moneylenders, and friends and family. Managing your cash flow is critical to avoid exhausting your resources when you hit a tough patch.”
By adhering to your cash flow forecast, you can spot low cash balances in advance and apply for a loan sooner.