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How Can a Business Effectively Manage Cash Flow?

    “Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.” (Peter Drucker). Cash flow can help determine the difference between success and failure in start-ups. Business owners, especially those that are new to their respective industry or field need to know that proper cash flow involves much more than a review of the profit and loss statement, namely leasing instead of purchasing, sending invoices promptly, limiting credit to clients, increasing sales and maintaining lean inventory. 

    To understand how to effectively manage business cash flow, it is necessary to clearly define cash flow. According to Adam Hayes from Investopedia, “cash flow refers to the net amount of cash… being transferred in and out of a company.”(Investopedia) This relates to leasing as it allows a business to utilize updated technology, while still having the ability to put lease expenses on the business tax return. In addition, business owners don’t need to put up as much money up front and they can have lower monthly payments as opposed to purchasing. Leasing as a strategy is just one of the many ways these businesses can increase their overall cash flow.

    Moreover, on-time invoicing has a large impact on the money that comes into businesses. As business owners sell their products or services, they need to make sure that clients and customers pay their bills on time. It can be challenging at times to manage all the invoices, something in which JTC CPAs is experienced supporting many businesses in this effort. We want our clients to make sure that they can focus more on their businesses, so we offer custom invoicing solutions that fit the needs of each business in their respective industries. 

    When it comes time for clients and customers to pay their balances, there can be leniency or lack of oversight for accounts receivable which may lead to excess credit extended to clients. When this happens, businesses may begin to receive less income and experience cash flow difficulties as a result. Clients may take advantage of long-term due dates as credit to further their own pursuits without having to pay on time. In order to overcome this problem, businesses should put together a plan to ensure that any invoicing which takes place has a firm due date and that the client or customer is knowledgeable about the terms. With JTC CPAs, business owners can stay on top of their invoicing and make sure that outstanding balance is paid in full and on time. 

    Another method of growing cash flow is increasing overall sales. There are many tactics to this approach of managing cash flow, and there are some key principles which help small businesses make and keep new customers. One option for business owners may be to carry out research about customers’ needs and find how their business can meet those needs. 

    Another solution could be to give each new client or customer value proposition, or something which makes businesses stand out from their competitors. 

    Marketing, when done effectively, is yet another method of growing sales in a small business. Creative marketing techniques include starting a social media page and making videos showcasing business owners and their respective products and services, or even just word of mouth and seeking referrals from existing clients. All of these methods will help boost cash flow and keep business owners moving forward towards reaching their goals. 

    There is something to be said about keeping inventory lean, which lessens the load on both the business owners and their employees. Not only does it simplify logistics, it also helps keep cash flow under control, especially when finances become tight. Although buying in bulk may look as a more cost-effective option, it is important to recognize the opportunity costs. As stated by Devra Gartenstein in Chron magazine, “[business owners are] likely to buy more than [they] need… [their] working capital will then be tied up in materials”(Chron) . Thus, it is imperative to plan ahead, buy inventory as needed in order to avoid running out of money when rent and payroll are due. 

    Whatever business owners’ motivation may be for managing cash flow, they can trust JTC CPAs to stay on top of accounts receivable, bills and day-to-day finances. We have experience with supporting business owners, making plans and setting goals to make sure that cash flow needs are spelled out and met within reasonable terms. We enjoy meeting with our clients. We welcome interested business owners with cash flow questions or concerns to reach out and contact one of our experts today!