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Cash Flow Management is Key to Businesses Health by Debra Sears, CPA

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Posted on November 07, 2023 by Debra Sears

Cash is king, especially when it comes to small businesses. An entrepreneur’s ability to effectively manage cash flow ultimately can mean the difference between success and failure. To keep the cash flow engine operating at optimal performance through economic headwinds, such as rising interest rates and tightening of credit availability, business owners should consider the following strategies.

Understand the difference between cash flow and profits.  Many small business owners incorrectly use the terms “profits” and “cash” interchangeably. For the sake of accuracy, the amount of cash a business has on hand at a specific point in time is not the same as the amount of profits it makes from sales of goods or services minus costs associated with that sale. Managing cash effectively refers to the timing of cash flowing in and out of the business.

Employ sound credit, billing and collections policies. Getting customers and clients to pay their bills on time can be especially challenging for small and mid-size businesses. One way to work around this is to expedite billing processes, sending invoices to clients when they place orders or at the time of shipping rather than at the end of each month. Similarly, if you provide customers with a service, require them to pay a deposit before you commence work.

Businesses may also consider extending a small discount to customers who pay balances early or imposing an interest penalty when payments of outstanding balances exceed a certain number of days or months. These policies, along with a business’s payment terms, should be prominently communicated to customers on all order forms, invoices and billing statements. No matter what strategy you employ, it is critical you have in place a robust system for tracking overdue accounts and managing collections.

Renegotiate payment terms with suppliers. Many businesses fall into the trap of paying for expenses associated with producing a product or selling a service before they physically receive customers’ payments. To avoid this scenario, you may consider negotiating with suppliers to establish more favorable payment terms that align with your operations’ specific cash flow needs, such as longer payment terms or discounts for early payments.

Trim down inventory. It can be cost-prohibitive to maintain an inventory of every item your business sells. Instead, consider stocking only those products that sell quickly or within a timely period. Old and outdated products could be sold off at a steep discount or donated to charity for a potential tax deduction, depending on your unique circumstances.

Reduce wasteful spending. When cash is tight, businesses must assess where they are spending money and look for opportunities to trim those costs. For example, do you need to order pens and legal pads when you have a stock room full of office supplies? Can you reduce travel expenses by limiting the number of executives who attend trade shows? Are you continuing to pay maintenance and insurance costs for equipment you no longer use? Would it help to free up cash flow if you leased needed equipment rather than purchasing it?

Reward employees with non-cash benefits. Although salaries still play an important role in attracting and retaining employees, today’s workers look at a company’s total compensation package when evaluating job offers. Consider offering a broad range of benefits that meet employees’ day-to-day needs, such as flexible work arrangements, unlimited paid time off, wellness programs, reduced membership fees, on-the-job training or even a simple thank you note. Employees also place a high value on the availability of employer-sponsored retirement savings plans, for which employers may reap tax benefits.

Look for deductions and other tax-saving opportunities.  The U.S. tax code offers a broad range of deductions and credits that businesses can apply to reduce their taxable income. When dollars are at stake, you cannot afford to take a wait-and-see approach to cash shortfalls, nor should you attempt to take a stab in the dark to rectify the situation on your own.

Engaging experienced accountants and employing integrated accounting systems can not only help businesses work through lean times, but they may also help business owners identify potential shortfalls before they cause irreparable damage.

About the Author: Debra Sears, CPA, is an associate director of managed solutions and technology with Berkowitz Pollack Brant Advisors + CPAs, where she helps start-up entrepreneurs, privately owned businesses and nonprofit entities automate accounting functions and gain greater insight into information needed to make mission-critical business decisions. She can be reached at the firm’s Boca Raton, Fla., office at (561) 361-2000 or info@bpbpcpa.com.