Your Small Business and the Importance of Well Managed Cash Flow

For any small business owner, you know various stress factors can sometimes outweigh any benefits. Sure, you have the freedom to set you own schedule, work for yourself, and decide for yourself any and all business related decisions. However, managing your sales and revenues, as well as watching your costs can at times get tedious and complicated. Your money is often tied up in ‘work in progress,’ customers don’t always pay on time… the list goes on and on.

Here are some easy tips for better understanding your company’s cash flow. Understanding your cash conversion cycle, knowing your accounts receivable and payable, and using inventory management software will help you ensure that the good almost always offsets the bad.

Cash conversion cycle

In layman’s terms, your company’s cash conversion cycle is how long (in days) it takes to convert resources spent on inventory into actual cash. Knowing this is vital, as it makes managing your company’s cash flow super easy. Once you’ve calculated how long this cycle is, you can make any adjustments necessary to speed up the process, and see cash flow sooner. Put simply, the cycle reads as such: your company gets inventory on credit, which then becomes your customer’s accounts payable. Once clients buy your company’s products on credit, this inventory becomes their accounts receivable. The cycle ends as soon as your company collects cash from customers, and inventory, property, and equipment are totally paid for.

Accounts receivable

You’ve also got to watch your company’s accounts receivable policies. Strictness is vital, as you need to ensure your customers are paying you and paying you on time. Make sure to send out merchandise only after it’s been paid for in full and run credit history checks for new customers who insist on paying with credit. You can also create accounts receivable aging reports for long-term customers, to easily monitor their payment patterns.

Accounts payable

Equally important to monitor, is your company’s accounts payable. Create flexible payment plans with vendors, and only pay then when payments are due, as you don’t want to pay others faster than you’re getting paid. Also, consider setting up an electronic funds transfer system with your bank, so your bills can automatically be paid on their appropriate due date. Remember, your goal should always be getting the most inflow of cash as quickly as possible.

Inventory management software

Keeping track of your company’s money can be stressful, but again, it doesn’t have to be. Your company’s money is probably tied up in raw materials, work in progress, and final goods inventory. Thus, inventory management software can help you track all of this. Various software options are online, and once downloaded, you’ll be able to see specifically what your company is selling, as well as all of your profits from sales. In short, you’ll know which products are more popular, and can know to order more or less for the upcoming season.