Did you know that at least 82% of small businesses in America are affected by cash flow problems? That’s why cash flow management practices in small businesses are vital to keep them running and increase profitability. You need to optimize your cash flow and stay on top of every financial detail. However, that can be daunting when you have many things to take care of, especially with a small or medium-sized team. So, your main question might be, how do you optimize cash flow if you don’t have a dedicated accounting team? The answer is hiring an outsourced CFO to help you!
Outsourcing your finances to an expert CFO will enable you to track your cash flow without the burden of a professional & experienced team’s payroll. They will help you check the inflow and outflow of cash and make annual projections accordingly.
You might be wondering why is cash flow such an important aspect of short-term planning, isn’t it? Fret not; this blog will resolve all your doubts.
Cash flow – explained!
Cash flow is basically the amount of money entering and leaving your business within a stipulated period. It is the balance between your sales which is the money coming in, and your expenses, which is the money going out. Anything left over is your profit.
There are two types of cash flow that you need to consider when handling your business empire:
- Positive Cash Flow – It happens when you have more cash coming into your business than what goes out. So, you earn a profit, cover your expenses, and pay your bills.
- Negative Cash Flow happens when more money is going out of your business than what comes in. So, in this situation, you fail to make the payroll and cover your liabilities.
Having enough working capital in your business is mandatory to ensure a profit and make the necessary payments.
How do you optimize cash flow?
Cash flow matters significantly, as it helps you run your business smoothly. Without adequate cash flow, several issues arise that even affect your daily business operations. That’s why cash flow management practices are a must for any business. You can do it by hiring an accounting team or with the assistance of an outsourced CFO.
Here are the top 9 ways to manage your cash flow effectively:
1. Manage your bookkeeping diligently
One of the top ways to optimize your cash flow is to keep on top of your bookkeeping. That means you need to ensure you have all your financial records handy. Moreover, it should have the correct dates, times, expenses, income, investments, and other financial details.
If you do not want to get into this trouble, use outsourced accounting services. They ensure to maintain your books regularly and accurately.
2. Generate cash flow statements
Generating annual cash flow statements is necessary for your business. It gives you an idea of where your money is going and when it is coming in. It will also help you plan for shortfalls in cashflows and anticipate your cash balances.
You must check your cash position every week or month, not only to know it but also to control it. You can use basic spreadsheets or any other tool to keep track of your cash flow.
3. Analyze the cash flow
Although creating cash flow statements is critical, it is more important to analyze them correctly to keep your business from losses or shutting down. If you read the reports rightly, you understand how your money is moving, where you need to optimize your expenses, and how you can improve cash inflow. In addition, it will also help you develop business strategies that can benefit you both short-term and long-term.
4. Cut your expenses where you can
Another way to optimize your cash flow is to cut down your expenses wherever possible. For example, suppose you are in a clothing business and spend too much on the packaging. It may not be a valuable decision in terms of cash flow optimization. If the packaging is causing you high expenses, you might want to cut them as early as possible.
That way, you will be able to balance out your cash flow and ensure more cash flows in than out.
5. Speed up your cash inflow
The best way to speed up the cash-inflow is to receive the payments on time. If you’re spending a lot of time waiting for payments from clients, you are affecting the daily operations by fluctuating running costs. Ensure to receive every compensation into your pocket soon. It will balance your cash flow seamlessly.
6. Improve Your Inventory
Keeping a check of your inventory is crucial to understand what products move faster than others. In services businesses, the same is valid for capacity planning. On the other hand, spending too much on products that stay in your inventory for long costs money and wastes space and other resources.
Sell off the inventory that doesn’t move quickly instead of buying more. You can even offer lucrative discounts to your customers to get rid of it. Instead of what to sell, sometimes it is more crucial to understand what should not. It’s not easy to walk away from services or products you want to own, but objectivity in such situations helps you to keep a healthy cash flow.
7. Dividing business into sub-parts
Breaking your business statements into sub-parts helps you understand the cash flow better. You can broadly categorize your cash flow into operations, investments, and financing. Then, calculate each section to analyze the cash flow in detail to determine the areas for improvement. Besides, you can also work on the account receivables and payables to streamline every process.
8. Cash flow forecasting & reviewing
Cash flow forecasting is crucial for a business as it helps understand future income, expenses, and cash inflow estimates. It basically tells you whether you will have enough cash in the future to maintain the current operations or expand them. Businesses generally review their cash flow when there are irregularities or liquidity problems. However, regular cash flow forecasting & monitoring gives you an upper hand to use the surplus cash wisely. It also helps you to know when cash outflow is more than inflow, assisting in forming a better strategy.
9. Strategy formation
Fix the roof while the sun is shining – it is an old saying which is absolutely relevant for any business scenario, including cash flow optimization. If a business is running smoothly at present, it doesn’t mean it will stay the same for the long term. The future is always uncertain. And we saw that when the Covid pandemic hit and shook the world.
So, it is always wise to plan and strategize your business operations while everything is stable. SWOT analysis is probably an excellent tool for forming strategies. You can create different cases, from best to worst, based on your strengths, weaknesses, opportunities, and threats. For each case, estimate the advantages or severity of the crisis and plan accordingly to sustain. Then, pinpoint the factors that could trigger liquidity problems and find the solutions far before the emergency occurs.
Why use an outsourced CFO to do it?
While optimizing cash flow is something you can do in-house, it can be pretty daunting, too, especially if you are a small to medium size business. You will benefit immensely when you hire an expert outsourced CFO. Here are the following ways in which outsourced accounting services will help you:
- Get an experienced team of accountants
- No need to hire, accommodate, and pay an in-house staff
- Get reliable financial data and opinions
- Reduce fraud risks as it adds an extra layer of oversight
- They stay updated on daily operations and adhere to all compliance norms
- They ensure the accuracy and timeliness of your financial data
- Get expert guidance on the optimization of your cash flow
Cash flow is the amount of cash that comes into and goes out of your business in a stipulated period. Keeping track of the positive and negative cash flow is essential to ensure you can make payments on time. However, optimizing your cash flow to stay on top would be best. That means you need to optimize your bookkeeping, generate cash flow statements, analyze the cash flow, and cut spending where required.
If you want an experienced team of accountants and financial experts, it might be a good idea to outsource these tasks to Stamos&Stamos CPA firm that provides outsourced CFO services.
Get in touch with us today to help us save millions of dollars for your business.