Invoicing for Entrepreneurs: Best Practices for Effective Cash Flow Management
Written by
- Redaction Team
- May 5, 2023
- Business Planning, Entrepreneurship
Cash flow management is an essential part of running a business, no matter what size.
In fact, it should be part of your business plan right from the very start.
You need to be on top of the money flowing in and out of your business. If you aren’t, you might find it difficult to operate or achieve sustainable success.
For entrepreneurs, cash flow is vital, as startups and small businesses often have tight margins. You may also be starting off with low sales as you build your brand and get your marketing campaigns rolling. However, your expenses tend to be quite high because you need to get your entire business operational.
It’s a catch-22 financial situation that needs careful control and consideration.
To help you keep a close eye on your money management, we’ve delved deeper into the best practices for cash flow management!
Know How to Calculate Your Cash Flow
If you don’t know what your cash flow actually is for your business, it’s impossible to choose the correct strategy to manage it.
There are three different ways to calculate your cash flow, and each one gives you slightly different information.
The first one is the free cash flow method. This calculation will give you a figure to work with when it comes to reinvesting in your business. You’ll be able to see exactly how much money you can use to buy new stock or equipment or to expand your business.
The second method is for operating cash flow. This one is all about your day-to-day finances and how much money you currently have in your business. It’s very useful to give you a quick view of what’s happening with sales and expenses.
The third calculation is all about looking to the future—the cash flow forecast method. This calculation helps you to project what kind of cash flow you’ll be looking at in the next month, next quarter, or next year.
Track Expenses and Compare to Your Budget
Any properly run business must have a budget for its expenses. It’s an essential part of business management and finances. The other side of the coin is that you need to compare your budget to what you’re actually spending.
It’s true. You really do often need to spend money to make money. However, at the same time, you need to ensure that you aren’t spending far beyond your means as a business and that you’re jeopardizing your cash flow.
Remember that your expenses will likely increase as your sales increase. You must account for this when looking at your cash flow and adjust your budget accordingly.
Keep a Close Eye on Your Inventory
If your business needs to hold an inventory of stock that you sell, or items that you use to provide a service, this needs to be a top priority for your cash flow management strategy. Holding inventory that isn’t getting sold or used is harmful to cash flow.
It’s important to cut items that aren’t selling or bringing in a return. You can get rid of them by having a sale and not replacing them in your inventory. When a business is just starting up, you can’t afford to hold on to stock that isn’t making you money. Just ensure that you still make a small profit or at least break even when you sell them at a reduced price.
Get a Loan Before Cash Flow is a Problem
Too often, getting a loan or a line of credit is seen as an absolute last resort to solve cash flow concerns. The problem is that you’re more likely to get rejected by an established or traditional lender when your business is facing money problems. If you do get approved, you may find that the interest or repayment rate is not favorable.
It’s far better to secure a loan or line of credit when your cash flow is looking good and your business is stable. You’ll then have a means of getting cash in an emergency when you’re struggling. Think of your line of credit as a lifeline for shakier times rather than as something you seek out when you’re already on the back foot.
Ensure You Have a Proper Invoicing System
Finally, you need to stay on top of your income and sales. This means having a proper invoicing system for your business and keeping proper records of all invoices, sales, and payments received. This is the other end of the scale of keeping a close eye on your expenses; they balance out your cash flow.
Even the smallest business needs to have a system in place for invoice processing. You need to send out your invoices on time as you make sales or complete jobs. You also need to track each invoice effectively so that you know what’s been paid and what’s overdue.
If you aren’t able to track when money is due to you and if payments are being made late, you can’t accurately track your cash flow. You also won’t be able to make projections for future cash flow or to properly plan for business expansion. Invoice management is something you should put in place right at the beginning of establishing your business.
Put Yourself in the Driving Seat of Your Startup
Cash flow management is quite possibly more important than any other aspect of operating a business. Without effective management in this department, you won’t be able to physically operate. You won’t have money to pay suppliers, pay salaries, maintain equipment or cover rent on your premises.
This is why it’s vital that you prioritize setting up a cash flow management system and monitoring it closely. This will give you the power to make forecasts for your business, and to keep everything running smoothly on the day-to-day front.
Remember, you need to know what money you actually have in your business. Not what money you’re owed or is due. You can’t spend an invoice until it’s paid by the customer!
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