August 19, 2019
Eighty to ninety percent of small business failures are caused by poor cash flow. Cash flow is the movement of money into and out of your business. Cash inflow comes from operations such as the sale of goods and services, financing, or the sale of assets. Cash outflow occurs during operations such as purchasing materials and equipment, meeting payroll, paying rent, insurance, and other business expenses; and making loan payments. It is important to balance the inflow and outflow of cash, so you do not have to rely on a loan or line of credit to meet your monthly expenses.
As outlined in our alert on
July 2, 2018
by David Gibbs, CPA, CCIFP, MBA, there are 15 ways to improve your cash flow:
- Invoice immediately.
- Bill on the same day each month.
- Use electronic billing.
- Get payment terms and agreements in writing.
- Include a specific due date.
- Charge late fees.
- Offer incentives for early payment.
- Factor (sell) your invoices.
- Hold off paying invoices.
- Take advantage of payment plans.
- Monitor your cash flow weekly.
- Start collections as soon as an invoice is past due.
- Establish an account receivable (A/R) management system.
- Dedicate staff to A/R management or outsource the function.
- Establish a line of credit.
In addition to the above recommendations, a cash flow analysis should be done. Doing so can help you understand how and when money moves into and out of your business. It involves taking a close look at accounts receivable, inventory, accounts payable, and credit terms. By analyzing each of these areas, you can identify issues and take corrective action to improve cash flow.
A cash flow analysis should be done on a monthly, quarterly, and annual basis. Comparisons should be made to prior periods to determine your cash flow cycle. Having current and historical information on cash flow will help you to:
- Understand the company’s cash position
- Prepare for changes in your cash position
- Control accounts receivables
- Manage cash expenditures
- Plan for capital expenditures and investments to grow your business
- Make decisions based on what you can afford
The goal of a cash flow analysis it to get to a position of excess cash flow so your company can operate in a strategic and proactive manner, rather than being reactive and defensive. Feel free to call any member of our team at 610-828-1900 (PA) or 732-341-3893 (NJ) to discuss strategies to improve your cash flow. You can also contact Craig Pollen, CPA, principal at
or me at
. We are always happy to help.
Martin C. McCarthy, CPA, CCIFP
McCarthy & Company, PC
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).