Business Strategies

Profit is an opinion, but cash is a fact, as the old saying goes. A business can show a profit on paper and still run out of money to pay its bills. Cash flow, the movement of money into and out of your business, is the pulse that shows whether the company is healthy.

Profit Versus Cash

If you sell on credit, the sale shows up as income right away, but you do not have the cash until the customer pays. Meanwhile, you may already have paid for materials, wages and rent. Buying equipment, repaying loans, building inventory and taking owner draws also use cash without appearing as expenses on the income statement. That gap is why profitable companies can still run short.

Forecast Your Cash

A cash flow forecast projects money coming in and going out, typically week by week or month by month. List expected collections, then subtract payroll, rent, supplier payments, taxes, loan payments and other outlays. The forecast shows when shortfalls may occur, giving you time to act. Update it regularly with actual results.

Speed Up Money Coming In

• Invoice promptly and make your payment terms clear.
• Offer easy payment options, including online payment.
• Follow up on overdue accounts quickly and politely.
• Consider deposits or progress billing for larger jobs.
• Review customer credit before extending terms.

Manage Money Going Out

• Negotiate payment terms with suppliers where possible, but pay on time to preserve relationships.
• Avoid tying up cash in excess inventory.
• Time large purchases carefully and consider whether leasing or financing makes sense.
• Set aside money for taxes throughout the year so payments do not come as a shock. Payroll and sales taxes held for the government must never be used as working capital.

Build a Cushion

Many advisors recommend keeping a reserve to cover several months of fixed expenses. Seasonal businesses in particular need to save during strong months. Arrange a line of credit before you need it, since lenders are friendlier when your finances look healthy.

Watch Early Warning Signs

• Customers paying more slowly.
• Relying on credit cards to cover regular expenses.
• Falling behind on payments to vendors or tax authorities.
• Rising inventory with flat sales.

Keep Good Records

Accurate, current books make cash planning possible. Our bookkeeping services can help keep your records up to date.

If cash is tight or you want a forecast built, talk with our firm.