How to manage cash flow for your business

Periodic cash shortfalls are as much a reality of running a business as hiring and paying taxes. Collections problems, unanticipated expenses, changes in work flow, and a long list of other events in a business can strain cash flow. These tight periods are not necessarily a sign of business troubles, but you do need a strategy for addressing them.

Here are some tips to help you plan ahead for how to access cash when you need it.

1. Evaluate your current savings

Consider whether your cash reserves are sufficient to see you through slow periods and help cover unforeseen expenses. Analyze your reserves by making a list of events that could threaten your business if not resolved quickly, such as the loss of a key client or damage to critical equipment. Some business owners calculate how much they should set aside by assigning a dollar value to these events and considering the likelihood that they will occur. If an essential piece of machinery would cost $10,000 to replace and there is a 20% chance that it will need to be replaced this year, you might set aside $2,000 to help cover that cost and then contribute more cash to it with each passing year.

Once you have an estimate of how much to set aside, consider using either a traditional savings or money market account to separate the funds from your operating expenses and allow access when you need it.

2. Maximize your earnings and access

Savings and money market accounts could help you increase your savings while keeping them accessible. Understanding the differences can help you make best use of available tools.

Money market accounts typically offer higher interest rates compared to savings accounts, but they may come with higher balance requirements to avoid monthly fees. (Read the terms carefully before opening an account.) Keep in mind that some accounts apply fees based on the minimum daily balance, while others may do so based on the average daily balance. If you’re unsure whether you can consistently meet the balance requirements, try using a no-fee account first to test whether your balances stay above the minimum.

Business credit cards can also be a valuable tool for managing cash flow. If you need to make a large unexpected purchase, charging the expense to a business credit card gives you added flexibility. This can be helpful if you will use a pending receivable to cover the expense. (However, be aware of interest rate charges if you carry a balance beyond your payment date.) In addition, some cards offer rewards on purchases, which can be put back into the business. You could even consider providing business credit cards to some employees to capture additional rewards on purchases.

3. Choose between leasing or buying equipment

Large equipment purchases can strain cash flow, so does it make more sense to lease?

Leasing can appeal to a business that has limited capital since the initial cost is lower than buying. However, over the course of the lease term, it’s likely you’ll end up paying more than if you had purchased it outright. You’ll also want to consider the type of equipment you need. If it involves technology that can become outdated, leasing gives your business the flexibility to lease the most up-to-date solutions available.

In other instances, buying is the appropriate decision. This is especially true for equipment that has a long usability life and doesn’t require updated technology. However, buying involves a higher upfront charge than leasing, so consider if your business can withstand this initial cost.

Knowing whether you’ll buy or lease will give you a better understanding of how much you need to save in advance and help you choose the appropriate savings plan.

4. Expedite receivables

Quick invoicing should lead to quicker returns. Consider automating your invoicing process so bills are sent in a timely manner and reminders are sent for late payments. Start by asking customers to pay at the time of service or product delivery. While negotiations may be in order, it’s helpful to position yourself strong to start. The sooner you are paid, the more sustainable your business’ cash flow.

The bottom line

Knowing how to manage cash flow is essential to your business, especially during periods when there are shortfalls. Planning for these cash-flow strains ahead of time can help your business continue to operate smoothly.

More information

We are committed to helping your business reach its potential. Our dedicated business banking professionals can help you find the right product to meet your business’ needs. To learn more about cash flow management, please call 1-800-428-7463, visit us online, or visit your nearest Citizens branch.