Effective Cash Management: A Must Have for Small Businesses

If you are a small business owner, one of the key focus areas that determine the running of a successful business is effective cash management. Thanks to public information provided by services like D&B, the interest rate and loan amounts from banks and lending institutions are primarily based on how well your business is able to manage cash.

If you are floating money and creating bad debt all over the place, other businesses will know about it. Managing cash is not just about perennial success, having a healthy cash balance in your balance sheet will also help you demonstrate effective management to potential investors by helping fodder a better valuation of your business. No one wants to buy an unstable company!

For daily stability, while you are sitting in the captain’s chair and making your baby look great for any potential investors and buyers, make sure you are following these 6 tenants for better cash management.

Working capital management

Often, cash flow management is restricted to just working capital management. This can mean actions like tightening credit lines and shutting off customers with excessive past due to balance; both of which can lead to delayed payments for your suppliers.

As a small business, unadulterated house cleaning practices can disrupt revenue as customers may move to your competition. As a small business owner, it is often a fine balancing act between the risk of loss of sales and the risk of bad debt.

Therefore, instead of tightening credit lines to all customers, try analyzing your customer’s payment history and their current business health before deciding on the depth of their credit line. While shutting someone off may be gratifying, it’s not always the best way to go about getting their balance.

Instead of polarized keep on /shut off classifications, a better course is to consider all of the following before you unsheathe the axe:

• Do they have a solid payment history?
• Are there trends where payments slow down then balances are paid in full?
• Have they always been slow to pay?
• Are they always a few weeks behind?
• Do they make efforts to contact you to deal with an open balance?
• Are they manageable past due but are eating up too many internal resources like customer service support?
• Have they ever bounced checks?

There are of course a million different things to consider here but the point is making sure you are not indiscriminately cutting off your clients.

Need for accurate cash flow forecasting

As a small business, you may not even be forecasting cash flows or have never even heard the word forecasting outside of a weather report. If you have not been doing so earlier, now is a good time to start.

The initial forecasts may be very different from actuals, but as your finance team learns to work with the sales and operations teams, the cash flow forecast would improve and it would go a long way in effective cash flow management. Cash flow forecasts and variance analysis against an actual need to be performed on a monthly basis in order to identify improvement opportunities at the process level (yes, monthly).

Accuracy of cash flow forecast is important, because an error in the forecast may result in either additional credit being availed at high-interest rates for working capital requirements or a cash squeeze which prevents you from fulfilling a big order. Often cash flow forecasts rely on inputs from the sales and operations teams and since these teams consider cash flow to be the forte of finance, do not contribute to the process effectively.

Poor governance and flouting of policies is another major reason for variations in the forecast. It is important to create awareness in the entire organization about the importance of cash flow forecasts and the responsibility of variance should be identified and held accountable. In your small business, do your employees understand the concept of cash flow?

Do they know what their individual role is in the overall picture of your company? Accurate cash flow forecasting is a powerful tool that can help you make the right financial decisions and therefore you will have to persist till you get this right in your organization.

Evaluate capital expenditure

This is especially important to adhere to in our current economy. It is essential to preserve the cash that your business generates! One way to do this is by slashing your capital expenditure. While you are on a growth phase, slashing capital expenditure may not always be feasible, but any capital expenditure has to be backed by a thorough analysis of “Return on Investment” and its impact on your cash flow statement.

If you are not financially savvy, it would be best to take the advice of your accountant or a financial advisor, before you go ahead with the capital expenditure. You may totally jazz up that your Google PPC campaign is generating 15 inbound calls per day and not care that it’s costing you 60k a month but your accountant may analyze the 15 calls versus conversions versus aggregate profitability and may calculate the ROI as a loss.

Optimize Your Taxes

Most small businesses are not aware of how to optimize their taxes and as a result, tax becomes one of the major cash outflow items. You need to sit down with your accountant and evaluate your business structure, your operational process and your accounting methods to identify ways in which you can optimize your tax outflows.

Entrepreneurs love to do things themselves but the self-help accountant practice of QuickBooks & Quicken aren’t going to advise you on appropriate optimization to make sure your quarterly or monthly tax burden is being allocated to minimize your loss.

Be aware of Incentives

No matter which part of the world you are operating in, there are typically a lot of incentives available for SMBs operating in specific sectors as well as for essential R&D, exports, etc.

For instance, some countries will penalize businesses through higher taxes if they outsource their calls to foreign agents instead of domestic inbound customer service companies. Discuss with your local government representative or a professional consultant on the various incentives available for your business and ensure that you fully avail of these incentives. This can help not only in having a healthy cash flow but also in improving your profit margins.

Build in a Culture of Cash Consciousness

This is especially important if you have separate teams handling sales and finances. Typically the sales team would consider cash management to be the responsibility of the finance team and would offer liberal credit terms for customers in the hope of increasing sales numbers.

If your sales team was left alone with no supervision, I would imagine the insane deals they would cut to make their quota or get that sales bonus. One way to overcome this hurdle is to incentivize cash conscious behavior. Thus, instead of sales incentives based on sales figures, you can offer sales incentives based on collections. This will ensure that your sales team focuses on not just achieving the numbers, but in the quality of sales.

Where cash flow becomes an issue is when a small business is run like small businesses. You can’t arbitrarily spend money on things that may be working or go months without analyzing your expenditures. Being your own boss is great but there’s much to learn from bug business management.

For a better chance at success, entrepreneurs should follow in the accounting awareness footsteps of larger corporations for success – or at least start with the 6 points above!