Cash is the fuel that keeps your business running smoothly. Without it, you risk imminent failure. Managing your cash flow can keep your business running, even during difficult times.

You need cash to pay your vendors, your employees and your bills, so it’s necessary to have at least some cash on hand at all times. But what happens if your customers pay you late? This can seriously disrupt your payment schedule. It’s wise to manage cash flow months and even years in advance to ensure that you always have enough to cover your expenses.

Calculating Cash Flow

The first step in managing your cash flow is to determine what your incoming receivables and cash on hand include. You’ll want to calculate cash flow by the month, quarter and year to start. Include:

  • Recurring revenue
  • Future projects
  • Cash on hand

Next, determine what your expenses are. These will include:

  • Rent
  • Utilities
  • Salaries
  • Vendors
  • Supplies
  • Mail and office supplies
  • Loan payments

The idea is, of course, to have more cash coming in than expenses going out. But even with the promise of cash coming in, this isn’t a guarantee. So next you’ll want to figure out how to improve your payables. This could mean cutting unnecessary expenses, asking vendors for extended credit terms or a combination of both. Buy used equipment to save some money, and find coupons on common office expenses.

You will also want to work to get your receivables in on time. Consider adding a late fee for payments received after the cutoff date, or offering a discount for invoices paid early. This can act as a stimulus to get your clients to pay you in a timely manner. Stick to your invoicing deadlines and show your clients that you mean business. Send reminders when invoices go past due, and stay on top of getting them paid. If a client is too far behind in payments, discuss stopping services until they get caught up.

You can also look at your profit margins and decide whether you could increase your pricing slightly. Even a 1-5% increase can help you have more cash padding. Raise pricing gradually to make sure your customers are still willing to pay for the products you sell at the new prices.

Rainy Days

Even when you have your cash flow statement nicely organized into income and expenses, you still need to get a game plan for saving some money in case of emergency. The day may come when your printer breaks (or worse: a $10,000 piece of machinery required to make your product!) and you have to replace it ASAP. It’s important to have cash in reserve for this type of situation so that you don’t have to turn to credit cards or an emergency loan with a high interest rate.

Build your savings into your cash flow projections and save a bit every month. If, in looking at your projections, you realize you will have an unusually large expense one year from now, calculate how much extra money you need to set aside to be able to pay cash for the item when the time comes.

Remember to keep an eye on both the present and the future when it comes to cash flow. While you may be prepared for a “rainy day” situation tomorrow, you may not realize that your business mortgage payment will double in a few months. Keep on top of what payments you have at least a year in the future.

Cash flow is key to the success of any company, so make sure to manage it effectively so that a lack of flow isn’t the cause of major problems to your company. Review your cash flow projections from time to time, as they will likely change as your business ebbs and flows.