top of page

Is the business having difficulty coming up with the money to pay payroll? Is the business bank account running on overdraft when paying a bill? Are you confused looking at a small bank account balance when the business is growing? This can be a common situation for a growing business, and it happens more often than you think. A growing business can be exciting, bringing in more customers, adding new employees, and adding new locations or equipment, but growth sometimes comes with growing pains. Some of those growth pains can be cash flow issues. If you find yourself in a position where you have no idea where the cash is going, and you don't have a budget, forecast, or cash flow projections in place (although, as a business, these are essential things to have), then read on as some of these tips may help you. Heads up, some of these tips require the business to have a sound accounting system.

Here are five tips on what to look for in the business to see what may be causing the cash flow issues and a few tips on how to work on them:

1. Review the business profitability.

Is the business operating at a healthy profit? A healthy profit will depend on the business model and the industry that it is in. Understanding if the business is hitting its target profit goals is important. It is also important to understand how the profit is being accounted for, meaning if the accounting system is running on an accrual basis of accounting, cash basis of accounting, or something else. If it is under an accrual basis of accounting, the profit and the cash flow are two different things, and it is crucial to review both the profit and loss (income statement) and the cash flow statement together to get the right picture of the business profitability affecting cash flow. If the business is running a net loss, then there is more review work to do to figure out what is causing the losses.

2. Review the cash reserves.

Does the business keep enough cash reserves in the bank? Keeping at least 3-6 months of operating expenses in cash reserves in the bank account is a good business practice to help cover any unexpected issues with the business. If the business struggles to build and retain cash reserves, other factors, including profitability, should be examined to determine why. The cash reserve balances should be frequently reviewed and adjusted if the business has seasonal/cyclical variations or is growing.

3. Review the accounts receivable.

Are the customers paying promptly? If not, then it may be hurting the business's cash flow. A good way to go about reviewing accounts receivable is reviewing the accounts receivable aging report, which should show open (unpaid) invoices that are outstanding (overdue) by the customer, separating it by time frames of less than 30 days, 30-60 days, and greater than 90 days. Make it a good habit (business process) to review this at least once a month. Start working on collecting the oldest outstanding balances 1st and work with your customers to get those balances paid.

4. Review the expenses, inventory purchases, and accounts payable.

It is important to review your daily, weekly, and monthly bills and expenses and see when they are paid. A common issue to look out for is when bills and expenses need to be paid and when customers are slow to pay, and all of this is happening simultaneously. Reviewing the accounts payable (bills) aging report is useful when figuring out what bills to pay and when. If the business purchases inventory for resale, check the inventory purchases, aging, and turnover to ensure the business is not tying too much money into inventory.

5. Review the debt payments, capital expenditures, and owner dividends (distributions).

  • Suppose you plan to make large purchases (capital expenditures) for large equipment or add a new location. In that case, it is good to have a budget for these types of expenditures and see how it is best to finance these types of purchases, whether it will be paid using cash, borrowing from a bank or creditor, or investing your own money or money from investors.

  • If you are making payments towards a loan, line of credit, or credit card, consider reviewing the required minimum loan payments. Although it is generally not good for a business to carry debt, if the business is currently in a situation of low cash flow, then cashflow has to be reviewed to see if it makes sense to pay off more debt now or later. If the interest is too high or the monthly payments are too high, consider refinancing the debt to a lower interest rate or longer payment term, if possible.

  • Most business owners know they are the last person to get paid from the business; their pay will usually come after they pay the employees, vendors, creditors, etc. But understanding how much the owner is paying themselves relative to the business profits is crucial because sometimes their pay might be eating up too much of business profits, if not all, and if that is the case, it will strain the business' cash flow.

Cashflow can be tricky to understand because of the complexity of how money comes in and out of the business and the timing of everything. Accounting accuracy is an essential item for being able to help you figure out your cash flow. Consider reviewing the following regularly, accounts receivable, expenses, inventory purchases, accounts payable, cash reserve balances, debt payments, dividends, and capital expenditures; it will give you a better understanding of what is happening with the business's money. The better you understand what is going on, the better financial decisions you can make, which will help your business's cash flow situation.

bottom of page