5 Tips for Better Cash Flow Management

One of the most important aspects of running a business is cash flow management. But many small business owners, particularly those in the trades, struggle to get control of it. Their schedules are packed, they’re working hard, but their bank accounts are telling a different story. 

An estimated 61% of small businesses worldwide struggle with cash flow, so you’re not alone in your plight. 

But it’s important to learn how to master the art of cash flow management. Here’s how:

1. Get Organized

The first step is to get organized. Cloud-based accounting software like Wave (free and great for new businesses) or QuickBooks (the better choice for established and growing businesses) can help you achieve this goal. These solutions will save you time and automate processes to reduce the risk of human error. In fact QuickBooks can even help you with job costing.

If you’d rather not use accounting software, you can use a spreadsheet. Spreadsheets aren’t ideal because they can get messy and chaotic, which increases the risk of errors. But it’s better than not tracking your cash inflows and outflows.

Start by putting your transactions into your preferred software. From here, you can start classifying things and tracking them.

2. Classify and Separate Expenses

Once your transactions have been transferred or recorded on your spreadsheet, you can classify where your money is going and separate your personal expenses.

All personal expenses must be moved out. If you’ve been commingling your funds, it’s time to stop that practice.

Expense categories can vary from one business to another, but a few common labels include:

  • Payroll
  • Advertising
  • Meals and entertainment
  • Employee benefits
  • Travel costs
  • Vehicle expense
  • Rent and utilities
  • Insurance
  • Loans and interest payments
  • Office expenses
  • Education
  • Gifts
  • Maintenance and repairs
  • Charitable contributions

Take a look at your expenses and create relevant categories for each type. You may have your own unique expenses that aren’t on the list above. 

Creating categories can be a tedious process, but it’s worth the investment to keep your spending organized. 

3. Track Every Month

Monthly cash flow tracking is the secret to business success. You will want to scour your expenses to identify:

  • Areas where you’re unjustly spending too much money.
  • Overlaps in expenses. For example, two of the same types of software that are redundant.
  • Expenses that are no longer necessary. Perhaps you let employees go and are still paying for their subscriptions that are going unused.

You should track your overall monthly material expenses, too. If you notice that material costs are rising but revenue remains the same, it may be time to adjust your pricing to maintain adequate profit margins.

Tracking monthly expenses should include:

  • Comparing your expenses to the previous month
  • Tracking year-over-year expenses to spot seasonal trends

Expenses grow as your company grows, and it’s easy to overlook costs when everything is going well. However, maintaining a LEAN business will allow you to invest more back into your company and maintain higher cash flow.

4. Analyze Trends

Trends are data that you can mine to achieve success. Chances are, you have data that you can review to transform the way that you do business. First, get your bookkeeping caught up to date.

Next, you’ll need to review these trends to understand:

  • Where you make the most money. Perhaps you have the highest profit margins and receive the fastest payments for bathroom remodels. You may use this data to try and land more remodels in this area.
  • Where you make the least money. Profit margins are always changing, and you need to know where you’re spending more money than you’re making. For example, you may find that excavating a job site has the least profits. You can cut these types of jobs, outsource them, or charge more.
  • What is contributing to your revenue the most? Perhaps you receive more than enough referrals, and PPC ads are not providing a return. You may also find that you spend too much on SEO and that Facebook Ads more than fill your sales pipeline.

Trends will also help you understand who your ideal customer is and what forms of marketing are working now. Every industry evolves over time, but you can maintain close control of your cash flow if you spot a trend early on and make any necessary adjustments.

Reviewing trends should include looking back on past income and expense data.

Try and spot seasonal business trends or falling segments of your business that you may want to abandon or consider reviving with more investment.

5. Review Regularly

Cash flow is the lifeblood of your business. You need liquidity to pay contractors, buy materials and keep operations running smoothly. As a general rule of thumb, you’ll want to review your cash flow monthly. 

Your review should include asking yourself questions like:

  • Where does my current cash flow stand?
  • What does my business have coming up that will impact cash flow?
  • What events will impact my upcoming cash flow?
  • Will you need to buy any additional inventory or materials for a big job?

If you ask yourself these questions and have a base for your cash flow already, it will allow you to perform a mini “forecast” of where your cash flow will be in the next week or month. Any business can benefit from monthly cash flow reviews, but if you have a lot of big jobs lined up, it may be worth the time to run a review more frequently, such as weekly, just to be sure that you have adequate liquidity.

QuickBooks has a great article that will help you run your own cash flow projections.

Cash flow management is crucial to your business’s long-term success. It’s estimated that 60% of SMEs fail because of cash flow. If you want to lower your risk of debt or becoming insolvent, you must have full control of your cash flow.

If you need help with your cash flow or want an expert to help you avert a cash crisis, we can help.

Click here to schedule a consultation with us to have us review your cash flow for you.

Ready to take control of your financial future?

Contact us today to learn more about our expert financial planning services and to schedule a consultation with one of our experienced planners.
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