Profitability is always a popular topic with small businesses, but, for most, it’s more important to focus on cash flow. According to CB Insights, 29 percent of new businesses cited lack of cash flow and capital as the reason for shutting their doors. During the COVID-19 pandemic, when many businesses have been forced to limit their offerings — or even close completely for a time — cash flow has become even more challenging.
What is cash flow?
Let’s take a moment to clarify what cash flow actually is. It measures the actual money going in and out of your business for a period of time. It can be in the form of cash, checks, electronic payments and more but doesn’t include sales made on account or invoiced and not yet paid. This is a major difference between profit and cash flow.
It’s possible to be very profitable and still have cash flow issues because of the timing. For example, if you’ve made sales and sent out invoices due in 30 days, that’s a big gap between the profits and seeing the actual cash materialize. If you have bills of your own due in less than 30 days, you could run into trouble.
As you can see in the example above, invoicing and receivables have a big impact on cash flow. Many small businesses can struggle to meet their obligations while they carry a large balance in accounts receivable (AR) that they just haven’t collected yet.
To optimize your AR, consider shortening the terms of your invoices (from 30 days to 15, for instance) or offering a small discount for invoices paid more quickly. This can encourage your customers to pay faster, improving your cash flow.
Make sure to invoice immediately when services are rendered or products are shipped. The sooner you invoice, the quicker it’s likely to be paid. It’s also wise to keep an eye on your AR aging reports to see what’s due and what’s past due so you can send out timely reminders.
Working with vendors
Speak with your vendors and suppliers in advance about options. It may be possible to delay payment or simply change the day of the month when you make payments to them, which can help close a cash flow gap.
While your vendors may be facing a COVID cash flow issue of their own, it’s still a good idea to identify your options ahead of time. This can help you maintain good vendor relationships, match up the timing of cash inflows and outflows, and avoid late payment fees.
We may not always know what’s coming, but we can plan ahead with a data-driven cash flow forecast. With accurate and up-to-date information in your accounting system, your accountant can create a cash flow forecast reaching several months into the future.
A cash flow forecast factors in all upcoming expenditures and the expected timing of incoming cash. This gives you a clear look at when you will have a cash surplus and when you may have a shortage. By planning ahead, you can make arrangements to cover shortfalls without the damage of last-minute scrambling. You can also identify surplus cash to save for a rainy day to help you weather those truly unpredictable storms.
If you need help managing your AR or tracking and forecasting cash flow to keep your business healthy during COVID, reach out to us at Padgett. Our network of CPAs, enrolled agents and tax professionals can help you put everything in place to protect your business in these challenging times.