Running a business comes with many challenges. Increasing revenue or finding ways to cut costs are important goals in a successful small business, but cash flow management is an aspect that can get overlooked. If the timing of your cash inflows is off relative to your cash outflows, it can create a serious financial problem quickly. Here’s what small business owners need to know about how to improve cash flow and the special care needed in small business accounting as a result.

Understanding Cash Flow in Bookkeeping

While many small business owners think of revenue as their business’ lifeblood, especially in the beginning, it’s really cash flow that keeps the blood pumping.

Cash flows are just what the name says they are: cash that moves in and out of the company. Cash on hand is actually irrespective of your revenue and expenses. How much cash you are moving in and out of the company coffers is what ultimately determines how sustainable your business is: a large revenue booking can wind up never materializing, right when a huge bill is due.

Accurate bookkeeping helps track cash inflows and outflows and creates predictive analytics based on when your business typically gets paid and pays bills. If your small business accounting system is robust and regularly updated, it helps ensure that payments are made and received in a timely manner.

Key Bookkeeping Strategies to Improve Cash Flow

Accurate Record-Keeping

Accuracy is the bedrock of solid accounting systems and cash flow management strategies. Precise records that carefully detail financial transactions reduce the risk of errors, which can quickly get costly. If you have accurate records of your financial transactions, it provides a much clearer picture of your business cycle and what you can reasonably expect cash inflows and outflows to look like.

Expense Management

Cutting costs isn’t always as simple as canceling a subscription you’re not using. Properly tracking expenses and categorizing them with an expense management system helps you identify areas where you have some control over the cost. You might find a new vendor or make better use of manufacturer specials. If you regularly have to pay late fees, your cash outflow timing could use some improvement.

Expense management can improve cash retention and positive cash flows by keeping costs down and pinpointing areas that can be reduced.

Cash Flow Forecasting

When your small business is new, cash flow forecasting can be challenging if you’re unsure what to expect. Nevertheless, there are industrial and time-specific norms that can give you a baseline in which to structure a cash flow forecast.

Anticipating when bills are due helps you plan your cash management for them. As your business matures, you gain a clearer idea of how long your business cycle is and the times of year you are flush with cash and then cash-poor. While it’s always possible to deviate from cash flows thanks to a viral video or sudden economic crisis, cash flow forecasts provide a historical baseline to work with that enables better cash management.

Leveraging Technology for Cash Flow Management

Many accounting technologies make small business cash flow management more efficient. Bookkeeping processes can be automated, such as invoicing, payment reminders, collections, and expense tracking and categorization. Cloud-based accounting systems can sync with financial accounts, automatically journalizing transactions associated with those accounts, and your accountant can access and review real-time updates.

These automation processes reduce costs, inefficiencies, and the likelihood of errors. Cash management tools can go one step further by providing up-to-the-minute analytics and insights into your cash flow dynamics, helping you plan for situations where cash could be scarce.

Enhancing Receivables and Payables Management

Effective bookkeeping helps ensure that your receivables cycles stay short with the power of efficient invoicing and chasing late payments. Many accounting automation systems assist with these functions. Offering incentives to pay early, like discounts or future credits, can also reduce the number and age of accounts receivable.

Accurate records that you can easily reference will also help streamline payables. Your financial institution may have options to consolidate your debts and save money in the long term. An accurate picture of how much you spend with vendors can also help you negotiate more favorable terms with them.

Compliance and Tax Planning

Accurate bookkeeping makes tax time less stressful. Having thorough and accurate records on hand that you can easily reference helps maintain steady cash flow and gives you a clearer idea of what your tax liabilities will be. In turn, this helps you with year-round tax planning strategies that ultimately play into your cash flow management strategy. When you have an idea of how much you will owe in taxes, you can plan for it and avoid a massive, unexpected cash outflow during tax season.

Effective bookkeeping also ensures that you can avoid costly penalties related to inaccuracies or missed deadlines because you couldn’t find the information needed to file your tax documents on time.

Regular Financial Review and Adjustment

Robust cash flow management involves regularly reviewing your current cash flows and strategy and making necessary adjustments. Your business and the economy will change over time, and a cash management strategy that works today may not work tomorrow. This is why regularly checking in is critical to ongoing financial health. Working with your accountant or financial professional to adjust your strategies as needed and set new goals and procedures is critical.

Effective bookkeeping helps minimize headaches, errors, and potential cash flow catastrophes. When you have an accurate picture of your financial situation, it provides context for what needs improvement and what you can reasonably expect in the future.

Struggling with cash flow? Contact Accounting Freedom today for expert bookkeeping services that can help you manage your finances more effectively and improve your cash flow. Schedule a free consultation now!