ARTICLE | March 20, 2024

Cash flow planning is an essential process that involves forecasting and managing the cash that flows in and out of your business. Effective cashflow planning can help businesses make informed decisions about expenses, growth strategies, and investments. It provides insights into when a business may experience cash surpluses or shortfalls, and generally improve overall liquidity. Below are a few potential strategies for managing cashflow:

Monitor Cashflow Regularly
Create a cashflow forecast to monitor your cashflow and update it regularly. This can involve using software that provides up-to-date information on your financial situation.

Enhance Receivables
Accelerate your cash inflows by invoicing promptly and offering incentives for early payment. Think about implementing stricter credit terms or employing a process for collections, if needed.

Manage Payables Wisely
While it’s essential to meet your financial obligations, take advantage of credit terms offered by suppliers. Prioritize payments based on their terms and the importance of the supplier relationship. Some vendors may offer discounts for early payment, which should also be considered.

Maintain a Cash Reserve
Building a cash reserve can provide a buffer in times of cash flow shortages, allowing your business to operate smoothly without the need for external financing. A good rule of thumb is to keep enough in reserve to cover 3 – 6 months of operating expenses, but the right number will vary based on factors like industry, fixed vs. variable costs, and so on.

Lease vs. Buy
Considering a large purchase? Something to analyze is whether leasing or buying makes more sense for your situation. Take into account monthly payments as well as other related costs like maintenance or storage.

Optimize Inventory
For product-based businesses, inventory management can significantly impact cash flow. Aim to strike a balance between having enough inventory to meet demand without tying up excessive capital.

Plan for Taxes
Your CPA is a good resource to help plan for tax obligations throughout the year. Effective tax planning can prevent unexpected tax bills that could disrupt your cash flow.

By understanding the importance of cash flow and implementing good management techniques, businesses can help safeguard their financial stability. Cash flow planning and management are critical components of any productive business strategy but will be most successful when customized to your situation. Partnering with professionals like Larson Gross to create an effective, tailored cash flow plan is a great place to start.

Please contact our office to discuss your business needs.