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Small Business

Managing Your Business

The Explainer: Managing Cash Flow

Keeping A Close Eye on Revenue and Expenses

Managing business finances can be difficult. The Explainer aims to help you better understand the services, terms and strategies that make your business tick.

Cash is the lifeblood of any business. If your small company takes in less cash than it spends, it may be in trouble. Managing the ins and outs of business cash can be a delicate balancing act, getting customers to pay in a timely manner while honoring your own commitments to vendors.

“Understanding your cash flow is going to be critical to keep your doors open and pay your bills," says Javier Marin, a business consultant for the University of South Florida Small Business Development Center.

Here are some tips from experts:

Have a cash reserve.

Playing your budget too close to the vest can result in a cash shortfall that freezes everything in its tracks. “A business owner should shoot for 30 to 60 days of operating capital that they know they have as a safety net," says Bill Harris, a financial planner in Duxbury, Mass.

Encourage clients to pay promptly.

Invoice quickly, remind clients regularly that their payment due date is approaching, and make it worth their while to pay quickly with early payment discounts. “When a client is too liberal in providing payment terms, then they're going to find that there's a lot of cash going out and a little cash just trickling in," Marin says. Some businesses improve cash flow requiring a deposit down at the start of a project, plus additional payments at various points in a lengthy job. Others simply require payment up front.

Don't overload your inventory.

Keeping large amounts of stock means less cash on hand for bills and other expenses. “Lean companies normally have a better handle on their cash flow than those that buy inventory and store it for months or even years," Marin says.

Keep an eye on the future.

At any given time, you should have an idea of what your cash flow looks like today, next week, next month and next quarter. What revenue do you estimate will come in? What expenses will go out? Do you have enough cash on hand in all scenarios? A series of short and long-term budgets can help you do this, as well as keep expenses under control.

Track your progress.

Did your expected cash flow match what actually happened last month? Why not? Understanding where you went wrong (or right) can help shape your actions going forward. Consider using software or a spreadsheet to track cash flow.

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