Managing Your Business’s Cash Flow

Written by: Zach Johnson

Knowing how much is coming in and going out is the first step to creating a profitable business

At the most basic level, business is all the exchange of value between two or more parties. In addition to credit, liquid cash is the most common way to exchange that value. Although some industries are more cash-intensive than others, no business can survive in the long run without generating positive cash flow — which means having more money coming in than going out.  So effectively managing your business’s cash flow is critical to your company’s success.

How cash flows in and out

Cash flows refer to the operational turnover of a business and its ability to generate revenues. Your company has an inflow or outflow of cash whenever you or an outside entity transfers funds to you or someone else either physically or electronically.

Cash Inflow

The Capital One SavorOne card hits a rate trifecta of rewards benefits with its high-value bonus categories of dining, entertainment, and groceries.  It’s a great cashback card for beginners who want a simple-to-use, rock-solid rewards system, and no annual fee.

Cash Outflow

Most anything you pay for qualifies as an outflow of cash including:

  • Employee payroll and contractor fees
  • Insurance
  • Attorney, licensing, accounting, etc. fees
  • Rent, mortgage, building maintenance
  • Marketing, research & advertising (including for social channels like Facebook)
  • Office supplies
  • Utilities
  • Real estate property taxes
  • Vehicle expenses
  • Travel expenses
  • Cost of Goods Sold (COGS) = anything necessary to create, sell or distribute your goods or service, such as materials, labor, packaging, etc.

Something to keep in mind when it comes to managing your business’s cash flow is that the legal transfer of value through a purchase made on credit doesn’t count as a cash outflow until you actually pay the bill.

A lot of your cash outflow may be tax-deductible business expenses.

The good news about many of your cash outflows is that they can be close to nullified by writing them off on your taxes,  saving your small business tens of thousands of dollars every year.  The catch is that you have to know what expenses qualify and you have to track and file them carefully if you want to maximize your deductions.

The IRS lets businesses deduct costs incurred throughout the year which are “ordinary and necessary to the business”. As a small business, most of your expenses are ordinary and necessary, so chances are the number of your deductible expenses will be quite high.

A good tax accountant will know which of your expenses are tax-deductible and which aren’t.  The rules can change from year to year so hiring someone whose job is to keep up with them is a wise investment.

But just an example, some common deductible expenses include:

  1. 1Mileage and vehicle expenses
  2. 2Entertainment expenses
  3. 3Rent and utilities
  4. 4Marketing expenses
  5. 5Employee pay and benefits
  6. 6Gifts
  7. 7Miscellaneous or general office expenses

Carefully tracking your business expenses will give you a clearer view of your company’s financial health, and make it easier to file for deductions when you file your taxes.

There are two types of cash flow you need to manage.

  • Positive Cash Flow.   This is when the cash coming into your business from sales, accounts receivable, settlements, etc. totals more than the amount of the cash going out of your business. If you’re doing well positive can result in a surplus that you’ll want to use to invest in your business, pay off debts, or bonus employees.
  • Negative Cash Flow.This happens when your company’s cash outflow is greater than your cash inflow.  This is not a good thing and typically means a small business is in trouble.  Fortunately, there are things you can do to reverse the flow by generating and collecting more cash while maintaining or cutting expenses.

Keeping an eye on your cash flow is key

Successful business owners always know what’s happening with their money.  And you should too.  As a rule, you should always know what happened to your business’s cash last month and what is likely to happen to it next month.

One way to do that is by tracking your cash flow results every month to determine if your management is creating the type of cash flow your business needs. This also helps you get better at creating accurate projections that you can rely on to make decisions on covering current expenses or take advantage of an opportunity to expand.

How to keep track of business expenses

Not paying attention to business expenses can cost you in a lot of ways, while tracking them closely can improve the profit margins. Here are some of the things you need to do to more effectively track expenses day to day and over the long term.

1. Open a business bank account

No matter how small your business is, it needs to have its own dedicated bank account. It doesn’t matter whether it’s a business savings or business checking account, it just needs to be separate from your personal or any other account. Don’t feel like you have to have your account at the same bank that you have your personal account.  Shop around to find the best deal in terms of fees, rates, perks, and other benefits.   Once your business account is open, you should use it for all of your company’s transactions.

2. Select your accounting method

It doesn’t have to be complicated. A lot of small business owners manage their own accounting, especially at the beginning when funds are tight. Simple spreadsheets like Excel or Sheets make it pretty easy to track and manage business income and expenditures. However, if you’re not good with numbers, worried about accuracy, or are just not comfortable doing it completely on your own, there are free versions of accounting software for small businesses that can help you out.  After your business grows, it’s probably worth investing in more sophisticated software or hiring an accountant even part-time to help you keep track of your inflows and outflows.

3. Properly categorize each of your business expenses

The great thing about many of your business expenses is that they will be tax-deductible.  But keep in mind that in order to get the deduction you’ll have to keep track of receipts and other proof of what you spent the money on and have it handy at tax time. If your business gets big enough you’ll have to categorize your expenses by individual, department, or specific budgets.

Many of your expenses as a small business will be tax deductible–but you have to be able to show it. Regardless of the accounting system you choose, you need to find a way to properly categorize each expense and retrieve it when the time comes for tax filing. Eventually, you will also need to categorize by department, individual, and specific budgets, so keep that in mind as you begin tracking expenses more carefully.

4. Daily and monthly accounting

If you’re doing expense management right,  you’ll always know exactly where you stand financially. Just setting up automatic expense management or sophisticated automated accounting software won’t give you a clear picture if you don’t use them strategically and consistently.  To do that you need to create workflows that make it second nature to record expenses every single day so that you don’t get behind or forget to account for expenses days. At the end of every month, be sure to balance the books by reconciling all accounts.  This way you can identify unpaid invoices, checks that haven’t cleared, and any other important transactions.

How to remedy negative cash flow

So what happens if all your meticulous tracking of cash inflows and outflows shows that you’re spending more money than you’re taking in?  Ignoring the problem will put you out of business faster than you think possible. It’s best to tackle the problem as soon as it arises. Here are X things you can do:

1. Create a budget to cover emergencies

This is something to do before you encounter negative cash flow because of an unexpected operating expense. Being frugal up front and setting aside even a small amount of funds each month will give the the cushion you need to weather the financial emergency.

2. Cut expense

This can be a relatively simple first step. But what to cut?  Financial experts recommend reducing recurring monthly, quarterly, or annual cash expenses. Keep the essentials but suspend services like “nice to have” software subscriptions.

Then look at cutting back on utilities, rent, or payroll.  Fancy office space is just isn’t necessary anymore.  That being said, in the current environment most landlords are very willing to cut deals.  They’d rather have a tenant paying half as much rent than having to bear the expense of empty office space that’s not generating any income. Look into communal spaces like those offered by companies like WeWork that provide flexible shared workspaces for technology startups and services for other enterprises. 

Companies like these design and build physical and virtual shared spaces and office services for entrepreneurs and companies.

You might also take a hard look at leasing some of your equipment instead of buying it.  Leasing computers, cars, or other business equipment lets you enjoy the advantages of the latest technology without having to make a big cash investment and you can deduct the cost of the lease on your taxes.  If you have equipment that you no longer use or inventory that’s past its prime, you should consider selling it to generate cash.

3. Increase sales

This doesn’t necessarily mean going out and frantically beating the bushes for new or added business.   Although adding some hustle to your sales efforts is certainly all to the good, there are other strategies you can employ.

4. Offer early payment discounts

One option is to improve cash flow is to offer your customers a discount if they pay their invoices early.  According to the accounting software company Xero, the average purchaser pays two weeks late which can significantly impact your inflow of cash.

Instead of waiting to receive payments from your customers, get create a system that might remind remind customers to pay on time via email or text to get a certain percentage off their bill.  Although discounts can ding your over all profit margin because of lost revenue receiving payments on time instead of late can allow you to better keep up with your own bills.  It’s also a sales tool for attracting new customers and keeping current ones loyal.  Your own suppliers may offer a similar deal, but make sure that paying early doesn’t negatively impact your cash flow.

5.   Take out a cash flow loan

If you get in a real bind and need additional financing to increase your cash flow, a cash flow loan could be an option. As you might expect, these loans are short-term and often charge a high interest rate.  If you do go this route, you shouldn’t use cash flow loans for expenses like your lease or payroll.  Instead use it for expenses that will pay out by increasing your business revenue, like new software or a marketing campaign.  Be sure to check out what kinds of loans the Small Business Association offers and that you can qualify for.

Negative cash flow isn’t the end of the world

The fact is, negative cash flow is a common facet of business growth and development, no matter how big or small your company is. The important thing is to keep a close eye on what’s coming in and what’s going out so you can quickly take steps to remedy your cash flow imbalance,

Create an endless amount of positive cash flow with up to  3% unlimited cashback.

The average small business has 5 credit cards with a balance of about $32k that they have to keep track of. There’s a better way than rotating through dozens of low-limit credit cards to get the funding you need to scale when you can get it all with AdCard — the best card for Facebook ads with the high limits and more you need to grow your business.

Exclusive Cardholder Benefits

  • Highest Limit for Ad Spend — Guaranteed. Forget dinging your FICO score to get a higher limit.  AdCard gives you all the ad spend funding you need to grow your business without hurting your ability to secure future funding from other sources.
  • Account Ban Protection —  Unlimited virtual debit and charge cards for ads so you can scale to the moon without the fear of getting banned.  It lets you use a card with a unique number, name, and address for each ad account, business manager, campaign, and network. Also eliminates the expense of cumbersome employee cards.
  • 7.5% — Highest Cash Back Card Available.  AdCard gives you up to 7.5% on your Facebook ad spend when you refer a friend each month.

Check out AdCard today.

Leave a comment: