Many small business owners don’t care about cash flow because they are either making money or don’t need it at that moment. 

While this is the right philosophical approach to business, it is not what banks and investors look for. 

If you start a new business, you must understand one of the most critical elements is money management. 

Cash flow is essential, and you should try to figure out how you’ll pay your bills from the money you get each month. 

This article explains the basics of cash flow and how to manage it.

What Is Cash Flow?

Before explaining the best methods to ensure that you have a stable cash flow base, you need to understand what cash flow is.

When most people think of cash flow, they think of money in their pockets and purses. However, cash flow is more than just cash. 

Cash flow is a broad measure of a company’s ability to generate extra cash. 

It is a measurement of how much cash a business will generate in the future and used alongside other analyses to determine its overall value.

Cash flow in accounting refers to funds coming into or leaving a business. 

For any business, knowing what’s flowing in and out of business is essential. 

A cash flow statement measures how much a company’s cash flows in and out over a specific period. 

A company’s cash flow statement is one of the three significant financial statements prepared by a company. 

The other two are the income statement (aka profit and loss statement) and the balance sheet. 

The cash flow statement is separated into different segments. These sections include:

• Operating activities section
• Investing activities section
• Financing activities section
• Cash flow statement summary

Cash Flow Is The Movement Of Money

An organization’s cash flow is the net amount of money it has coming in and going out. 

Positive cash flow generation is determined by maximizing what is known as long-term free cash flow.

What is Free Cash Flow (FCF)?

Analysts use this measure to assess a company’s profitability: the amount of money left over after outflows to maintain operations and support capital assets.

Positive cash flow indicates a company is building up its cash reserves, which allows for reinvestment in the business, to pay shareholders, or to settle debt obligations.

Cash flow occurs in three ways: 

• Operating: Operating cash flow is generated by the company’s main business.
• Investing: This includes the purchase of capital assets and investments in other companies.
• Financing: This consists of the debt and equity proceeds plus payments made by the company.

How a Business Uses Cash Flow

Financial reporting’s primary objective is to evaluate the amounts, timing, and uncertainty of cash flows. 

The cash flow statement provides valuable information about financial performance and liquidity since the cash flow is reported as operating cash flow, investments cash flow, and financing cash flow.

Positive cash flow indicates a company’s ability to resolve debt, reinvest in its business, deliver money to stockholders, finance expenses, and buffer the company against anticipated financial difficulties. 

Financially flexible companies can profit from profitable investments. They also avoid financial distress during downturns.

Why Invoicing Is Essential

Invoicing is the accounting and record-keeping used to calculate financial transactions between a business and its clients and suppliers. 

Invoices may seem inconvenient, but they’re also necessary. 

Late payments hurt businesses, cause them to shut down, and prevent them from expanding. 

If the business is large, this can result in a decrease in profits and a rise in borrowing costs. 

Getting paid on time for your work, and paying your suppliers on time, can make a massive difference to your business’ success. The World Bank estimates the global cost of late payments for small and medium enterprises is $2.6 trillion.

This is a considerable amount, and by leaving invoices unpaid for any period, you are putting the health of your business at risk.

Getting Paid On Time

Most of the time, clients pay on time and in full. However, there are times when clients may delay payment for whatever reason.

In these situations, good bookkeeping becomes vital.

There are several options at your disposal.

Use Software

Several software systems can help you in collecting payments. For example, Payt Software is a full suite of tools that allows you to manage late repayments and even enable you to check potential clients’ creditworthiness.

As they say, prevention is the best cure!

Keep Track Of Late Payments

Sometimes your client may not respond to an initial email concerning late payments. This is fine because we all miss the occasional email.

However, what separates businesses with positive cash flow from those with negative ones is their persistence in following up.

It may sound daunting to remember to email late clients regularly during your regular day to day activities. However, there exists specialist invoice follow up software that can solve this problem for you.

You set the schedule and input your messages, the software does the rest.

The great thing about this software is that it automatically switches off once the client performs an action, such as opening the email or replying.

This is important so that you don’t cause unnecessary conflict by emailing them repeatedly after paying.

How Often Should Invoices Be Sent?

It is widely accepted that sending invoices more frequently than needed is bad practice. But how often should you send invoices? Should you send several invoices per month or just one per month?

The answer depends on several circumstances, including how well you know your clients if they offer repeat business and more.

However, a general rule is to send an invoice as soon as the work is completed and signed off.

Prompt invoicing increases the likelihood that customers will pay. 

Nevertheless, if your customer is always late, you could start by sending them an email once a week for the grace period, then bump it up to every few days, all the way to once a day if needed.

Set Up Multiple Payment Options

If your client doesn’t settle their invoice by the due date, it may be because they’re unable to pay via the method you’ve designated for them.

Provide them with several options to pay, and they will be able to settle their bill, and you can move on to another client.

Establish Late Payment Penalties

When your client signs the contract, they will understand that any late payments will result in a penalty.

You can give them a grace period during which they can pay without incurring penalties, but you must ensure they understand the importance of timely payment to your business.

Summary

One of the most important and least understood financial measurements is cash flow. 

While no doubt having more cash will come in handy for everyone, the fact remains that some people do not realize the importance of cash flow, and that can have serious consequences.

Late payments can cause your business to close down or accumulate an unmanageable debt pile.

By ensuring that your clients pay you on time, you will avoid these outcomes and maintain positive cash flow for your business to invest in the future.