Table of contents. Introduction to Small Business Cash Flow. Calculating your Company s Cash Flow. Timing your Cash Flow. Monitoring your Cash Flow

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1 INTRODUCTION TO

2 Table of contents Introduction to Small Business Cash Flow Calculating your Company s Cash Flow Timing your Cash Flow Monitoring your Cash Flow Meeting Cash Flow Challenges When and How to Offer Customers Credit Tips for Speeding up Payment Managing your Own Cash Flow Conclusion

3 Introduction Cash flow can easily make or break a small business. In order to make certain that your business succeeds, learning how to master cash flow is essential. At the heart of small business cash flow is ensuring that your cash in and cash out are synchronized. When you have cash flow coming in, you are able to meet your expenses, pay your employees, and even expand your operations. Without cash flow, however, you could find yourself facing a shortage and unable to meet payroll, let alone expand. In this guide, you will learn how to calculate, monitor, project, and protect your cash flow in order to help your business succeed.

4 Calculating your company s cash flow The most basic and important step in managing your business s cash flow is to perform some essential preliminary calculations. After all, you cannot possibly manage your cash flow if you do not first know where you stand; therefore, it s crucial that you have a budget in place that projects both profits and losses. This can be accomplished by analyzing anticipated income and expenses. Having a budget for your business is important for many reasons, but for the purposes of this guide, we will learn how a budget can assist you in anticipating your company s cash flow needs and ensure that your business operates smoothly. Several components are included in your company s cash flow, including: Starting cash This refers to your company s beginning balance or the amount of cash that you have on hand at the start of each month Cash in This refers to all of the cash that you receive throughout the month. This includes all sales, paid receivables, and sales of stock or assets Cash out This refers to all variable and fixed expenses Ending cash This refers to your ending balance. Your starting amount of cash is added to your cash in to form your total amount of cash. Your amount of cash out is then subtracted to form your ending cash.

5 Let s take a look at a quick example of how cash flow is measured based on the above formulas. Suppose that you begin the month with $50,000. You bring in $10,000 in sales along with $1,000 in paid receivables. During the month, you paid out $1,500 in rent, $500 in supplies, and $5,000 for wages and owner s draw. This is a total of $7,000 in expenses, creating an ending balance of $54,000. In this example, your cash flow is $4,000. In order for your business to thrive, you always want to ensure that you have positive cash flow, meaning that your business is taking in more money than it is spending. While this might seem simple enough on the surface, even small blips in sales or an outstanding bill can make a significant impact on your company s cash flow. You might not even notice these issues unless you analyze your cash flow budget. This is why it is imperative that you compare your sales with your estimated cash flow at the end of each month and compare the results to your budget. If you notice that your cash flow is not synchronized, it is time to identify the cause and determine what you can do to rectify the situation.

6 Timing your cash flow Timing is crucial to cash flow. Most businesses are vulnerable to operating cycles. Perhaps your business thrives during the summer and lags during the winter or vice versa. A variety of other timing factors can also impact your cash flow, including when you buy or sell using credit, the costs associated with operating your business, your company s collection process, and when you receive payments. Monitoring your cash flow By understanding your cash flow, you will be able to anticipate when your company s cash flow needs will actually occur. While you can never have a crystal ball when it comes to business, this will provide you with some insight regarding the ability to predict what is coming. In order to do so, you must be diligent about keeping daily records and recording cash coming in as well as going out. These steps can assist you in monitoring your cash flow: Always used numbered cash receipts Account for all receipts Deposit checks on a daily basis Send out invoices to customers within a maximum of two days Collect all receivables owed to your company within a maximum of 60 days Use cash discounts when possible Use numbered checks for all disbursements made by your company

7 Meeting cash flow challenges All companies face challenges from time to time this is the nature of owning a business. Perhaps you know that slow times will come during a certain time of the year. During those slow times, your company may have difficulty in meeting payroll. By reviewing your cash flow and predicting such shortages, you can be better prepared when a challenging time hits by tapping into additional sources of cash, including short-term business loans. Various ways in which you can help project and meet cash flow challenges include: Anticipating payroll in advance Anticipating outstanding debt payments Setting aside funds to cover emergencies, expansion, and opportunity purchases Taking advantage of short-term loans as needed

8 When and how to offer customers credit One of the biggest threats to the cash flow of small businesses is customer credit. In some instances, it may seem as though offering credit to customers is a necessity of conducting business. In other cases, offering credit can be viewed as a viable source for generating new business. Before deciding whether you should offer credit, it is important to understand that there are two different types of credit: consumer credit and trade credit. Consumer credit refers to the acceptance of debit cards and major credit cards. This type of service is offered by setting up a program through a merchant account, which charges a nominal fee or a percentage of each transaction.

9 Trade credit is a type of credit that is offered by the business itself. Trade credit is actually expected in many industries, including wholesaling and manufacturing. When you offer trade credit to a customer, you send out invoices with terms of payment. The most common term of payment is 30 days, which means that you are offering 30 days of credit. Prior to establishing trade credit as a policy for your company, it is important to understand the amount of risk that you are accepting. Many credit bureaus offer training regarding credit procedures. You should make certain that you completely understand the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collections Practices Act, and the Charge Card Disclosure Act. In order to survive as a business and successfully manage your cash flow, it is critical to establish good credit policies. In many ways, when you offer credit to a customer, you are acting as a lender. Therefore, it is important to ensure that you offer credit only to those customers who are considered a low credit risk. You should also establish a credit plan for your company that includes: Your company s credit policies A credit application Credit limits Oversight for credit usage Collection policy Managing the credit that you offer to your customers is an integral element of your company s cash flow management. Take the time to analyze the credit activity of your clients and weed out those that cost your company more to maintain than contribute to your firm s profits. Continual analysis will also allow you to flag those customers who exhibit a history of making slow payments. In such instances, it may be necessary to change that customer s terms of credit or even completely eliminate credit.

10 Tips for speeding up payment One of the most important steps you can take for speeding up payments from customers is to invoice your customers in a prompt manner. Delaying invoicing provides customers with the idea that you are not concerned with how long it takes to receive your money. In addition, institute measures to ensure that you receive payments promptly. One of the ways in which you can do this is to state payment due dates clearly on invoices. When invoices are overdue, send out reminders. Although it may seem unpleasant, use collection services for payments you are not able to collect on your own. Managing your own cash flow While it is always important to manage credit in regards to your cash in, it is also important to make certain you are properly managing credit in terms of cash out. Begin by checking the credit terms offered by your own suppliers. The most common payment term is 30 days, but when necessary, you may be able to get suppliers to extend that time frame to 60 or 90 days. If so, this will allow you to keep more funds in your cash flow for a longer period of time, a fact that can be crucial during lean times. You might also consider renegotiating contracts for more favorable terms. Conclusion The task of managing cash flow is one that can often seem challenging for many small business. Although it might seem difficult, it is a task that you can handle with proper steps in place.

11 CapFusion provides a variety of financial services to help small business owners manage their cash flow and grow their businesses. To learn more about our small business loans and merchant services, visit us at