Cash flow is the fuel that powers a small business' operations. When it is lacking, everything comes to a screeching halt. Yet surprisingly, one of the most common mistakes that small business owners make is that they are out of touch with the flow of capital going in and coming out of their companies. As a result, they fail to foresee and thus respond to a temporary cash shortage.

Through effective cash flow management, business owners will be in a better position to recognize and handle future cash shortfalls and thereby keep their business operations running smoothly. The following is a brief guide to cash flow management that offers several tips on how business owners can improve the flow of working capital within their companies.

What is Cash Flow?

Before discussing cash flow management, one must first understand what the term"cash flow" means.

A business' cash flow represents the flow of working capital that comes into a business and is paid out. It is usually unrelated to the company's profits or loses. For this reason a business can be profitable on paper, yet at the same time be short on available cash. Cash flow is basically effected by a business' accounts receivable, inventory, accounts payable, capital expenditures, and incurred debt.

Tips for Effective Cash Flow Management

Get a good accounting software package. Most accounting software programs offer a full range of features such as financial reporting, payroll management, and billing. Currently, the top accounting software applications for small businesses include: Quickbooks, Peachtree, MYOB, and Sage. For business owners who find these options too expensive, there are several multi-featured opensource programs available, such as those offered by GnuCash and TurboCash.

Make it a point to monitor cash flow on a regular basis. Many small business owners shy away from actively using financial reporting to help them run their businesses. Usually they do this out of ignorance or just plain reluctance to give up the necessary time or resources. The truth is, however, that there is a lot to be gained from using these tools. A monthly cash flow schedule, for example, clearly depicts where a business' capital is being held and where it is going so that business owner are left with an overall picture of where the business is holding.

Take steps to maximize accounts receivables. By establishing an effective billing and collections system, business owners can go a long way towards maximizing their receivable income. Seek ways to keep customer debt under control by rewarding customers who pay on time and creating a plan of action for slow-pay and no-pay accounts.

Pay attention to how the business is spending money. First on the list in this category is inventory management. Business owners should make sure that they are not overstocking their business and thus tying up precious capital. They should also make sure that they are fully utilizing any lines of credit extended to the business by their vendors. Finally, they can look for other ways to cut costs, such as using energy efficient products and establishing resource conserving practices, printing online postage provided by the USPS and doing shipping comparisons.

Look for ways to simplify debt payments. Business owners should take the time to ensure that they are accurately recording all of their business' outstanding bills and loans, including due dates and payments made. Depending on the nature of the debt, it may be beneficial to seek debt consolidation.

New or growing businesses should consider leasing equipment and/or furniture. By doing so, they avoid having to lay out capital for the initial down payment. If equipment leasing is not a good option, then at lease seek vendor financing so that payments can be spread out comfortable over time.

Be aware of ways to get quick financing. When a sudden cash shortfall arises, business owners should already be familiar with some quick financing options. These options tend to come with higher interest rates, but in most cases, the money can be received within a week. The most popular (and most legal) options include: merchant cash advances, accounts receivables factoring and accounts receivables financing, equipment lease-back, and activating a business credit card or a business line of credit.

In short, business owners need only to invest a bit of time and effort to dramatically improve their company's cash flow and thus improve their chances of running a healthy and successful business.

 

 

source: http://businessmanagement.suite101.com/article.cfm/tips_for_effective_cash_flow_management