Cash flow is one of the most important metrics in your business.
In this episode of MissionBusinessPodcast.com, Bernard Roesch explains why cash flow is so important, how you can use QuickBooks to understand your cash flow situation, and what you can do to improve your cash flow.
If you have any questions about this podcast episode, please feel free to contact us.
What is Cash Flow
Cash flow, in its simplest form, is money coming in and coming out of your bank account.
- Cash flow is different than income – You can make a sale in your business but not get cash from that sale right away. For example, if you sell a product to somebody but agree to receive payment 30 days from the time you give them the product, then your cash flow is not positively affected until 30 days after the sale.
- Cash flow is also different than expenses – You can incur cost for an expense but not pay for it right away. For example, if a consultant provides you with services and sends you an invoice that is due 30 days from now, you have incurred an expense, but this expense has not negatively impacted your cash flow yet since you haven’t paid the invoice.
Cash flow is the most important metric in your business, because if you run out of cash, you will not be able to pay your bills and keep the business going. It’s very important to have advanced insights into potential cash flow issues that are on the horizon for your business.
How to Improve Cash Flow in QuickBooks
The main factors that influence cash flow are accounts receivable, accounts payable, and inventory. There are a few cash flow best practices for accounts receivable to consider.
Collecting payment – You need to ensure that you can actually collect payment for services and products that you have sold.
- While it is normal to extend terms to customers to allow them to pay after receiving the service, it’s important that you ensure you are able to collect payment for these product sales or services.
- You can improve your chances of collecting payment by doing credit checks on customers before extending payment terms.
Keep track of outstanding credit – Keep records of the total credit that you’ve provided to ensure you are not overextended.
- While providing credit to customers is not a bad thing, it’s important that you not have too much credit outstanding across your entire business over time.
Have a collection process – Similar to how you have a process for manufacturing a product or providing a service, it’s important that you have a process for collecting payments. Sending out invoices is obviously part of that process, but you also need to have a process in place to remind customers of payment before the due date and to continue to request payment after the due date if they’re having trouble paying.
- Within QuickBooks, you can track the amount of outstanding accounts receivable, the age of that accounts receivable, and status of unpaid accounts receivable.
- Using this data from QuickBooks, you can run an effective collections process.
There are also best practices for inventory-based businesses. If you have an inventory-based business, consider the following:
Track inventory carefully – It’s important to track the physical inventory on hand in your business. This inventory is effectively cash that is sitting on the shelves, waiting to be turned into cash when sold. Track inventory carefully within QuickBooks or another system and ensure it’s accurate by doing physical counts periodically.
Track turnover time – Tracking how long it takes to sell a product, called turnover time, ensures that you are converting inventory to cash at a reasonable pace.
- If a product sits on the shelves without selling for too long, you may need to liquidate that product to convert it to cash by selling it at a much lower price.
- Similarly, tracking product that is not selling is important so that you can be sure not to grow inventory of that same type that would only exacerbate the problem.
- This can significantly hurt cash flow for a product-based business.
In addition to accounts receivable and inventory, there are a number of best practices to consider for accounts payable.
Payment terms with your vendors – Establish reasonable payment terms with your vendors. Each industry is different but there are usually norms around the time for payment and terms.
- While everyone would prefer to be paid in advance upfront, it’s perfectly reasonable for you to have payment terms with your vendors.
- This allows you to acquire supplies and services without incurring, without spending cash right away.
- When crafting these terms, make sure that they are predictable for everyone.
- That makes it much easier for you, as well as your vendors, to plan for their own cash flow situation.
Get Cashflow Support
You can also visit MissionBusinessPodcast.com for more insights that Bernard has been sharing with us in the previous episodes.