10 Cash Flow Management Tips for Small Businesses

hi this is tim yoder with fit small business and today i'm going to give you my 10 tips for small businesses managing their cash flow my first tip is that don't pay your bills until they're due i know sometimes the easiest thing to do is write a check as soon as you receive a bill but that's generally not good cash flow management you'd like to keep as much cash on hand for emergencies that come up or perhaps opportunities that present themselves like getting a discount for paying a bill faster than normal so don't pay your bills until due the easiest way to track your unpaid bills is to use an accounts payable software or an accounting software like quickbooks online that has a bill payment management feature so enter your bills as they received your software will help remind you to make sure you pay them on time so you want to pay them on time but don't pay them early my second tip is to invoice your customers quickly once work is complete so not only will you receive your cash faster by sending them the invoice faster they'll pay the invoice faster so when they receive the invoice and the work or the product they just received is still on their mind they're much more likely to pay it quickly if it's been a month since the work's complete they're going to receive that invoice and wonder if they'd already paid it they're going to have to do some research they're going to set it on their desk and it's going to get buried so invoice your customers very quickly that will really speed up your cash collections reconcile your bank account regularly so not only does this catch errors it's a really important step to make sure that you don't overdraw on your checking account because the errors or the omissions in your accounting records so say withdrawals that are on your bank statement that are not in your accounting records those could very easily call you cause you to overdraft in your checking account which of course costs bank fees and perhaps even your relationship with vendors utilize a line of credit so there are times when you want to use cash that it may be worth borrowing on a line of credit so perhaps you can use the line of credit to avoid late payment fees uh that might be worth it you could also use the line of credit to take advantage of early payment discounts so perhaps if your vendor gives you a uh 2 10 net 30 that means that you if you pay within ten days you get a two percent discount uh well that's really great you're only paying 20 days early 10 days instead of 30. you're paying 20 days early and getting a 2 savings that is a huge annualized rate of return on that so that would be very worth utilizing a line of credit now obviously you don't want to use it more than you have to because they do charge you interest but there are certainly opportunities where it makes sense to pay a little interest in order to have some extra cash if you're not that familiar with with um bill payment terms i will throw a link in the description below to an article we have uh that describes uh common invoice terms and the early payment discounts uh et cetera so i'll throw that into the description below i encourage you to accept electronic payments or checks rather than just accepting cash so first off the presence of cash is obviously opens up the possibility of theft so we'd prefer not to have cash checks are better um at least they're a little harder to steal but they still take time to process ideally we'd like all of our customers paying with credit cards those get into our checking account much much faster now obviously there are some fees associated with credit cards um but make sure when you're deciding whether those fees are worth it you're taking into account how quickly the money gets into your checking account and is then available for things like early payment discounts without having to borrow on a line of credit and also remember that by paying those credit card fees you're not having to worry about theft of checks or money deposit all your cash received daily so wouldn't it be a shame if you overdraft your checking account while you have a pile of undeposited checks sitting in your desk obviously we don't want that to happen so deposit all of your cash and checks received daily make sure you deposit all of the cash received don't take money out don't take cash out to use before it's being deposited owners i know it's very tempting to just stick your hand in the cash register and take out whatever you need for lunch but you really shouldn't do that because once you do that you lose all control of your cash flow right you need the cash deposited in the bank to equal the cash received by your business that day that way you know no cash has gone missing once you start taking out a little cash things don't balance and it's very hard to tell how much cash was taken out so make sure the cash gets deposited before it gets spent so that we have a proper paper trail if you have excess cash we've talked about what to do if you're short of cash that would be a line of credit if you have excess cash consider something like a money market checking accounts typically pay very little interest if any savings account tends to be a little bit better but money market money market accounts tend to be better yet than savings accounts money market accounts are not fdic insured so make sure you understand that however they are very low risk their investment objective is to maintain a market value of one dollar per share it's extremely rare for a money market uh account to dip down below a dollar or above a dollar it stays right at a dollar pays you interest it acts like a bank account essentially however it is not fdic insured establish a petty cash fund so don't waste a lot of time writing checks for every little expense make sure you have a petty cash fund so little expenses like say a pizza for the office at lunch time can just be reimbursed out of petty cash instead of having a separate check written so i will throw a link below into a to an article we have on how to manage a petty cash fund so you can see exactly how to do that if you're interested saves a lot of of headache with smaller expenses you need to segregate your cash handling and recording duties so you need to have one person's that's holding the cash their cash custodian and that can't be the same person that's recording the transaction which is your bookkeeper so you need to have a custodian of the cash in checks and you need to have a bookkeeper and those need to be separate people and finally determine your cash conversion cycle and so this is really something to help evaluate your cash management to see if you're doing a good job or not essentially this cycle measures the number of days it takes from the time you order inventory actually until you purchase inventory until you actually then receive the cash back from the customers to complete the cash cycle so it's when do you pay for inventory then you receive the inventory then you sell the inventory then you collect the receivables so how long does that take that's your cash conversion cycle and obviously we would like that to be as short as possible so as you implement new cash management techniques you know issuing your invoices within 48 hours following up on delinquent invoices very quickly as you do all these things as you introduce new policies track that cash conversion cycle to see the improvements that you're making now i'm not going to go into the detail of how to calculate this right here i will include a link to our cash management tips article that goes along with this video and in that article we do have a calculator as well as detail as to how to calculate this cash conversion cycle so those are my 10 tips for small businesses in managing your cash flows i hope that was helpful my name was tim yoder and i hope to see you again soon

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