Smart Accounting Practices To Improve Cash Flow

business woman uses a calculator to calculate the company's performance figures, graphs the monthly graphs for the meeting.

No one knows who coined these words:  “Revenue is vanity, profit is sanity, but cash is king.”

The importance of a positive cash flow can’t be overstated.  It’s much more important than profits.

Here’s why.

Profitable but troubled

A company can be profitable but need more funds to pay its current operating expenses.  

How is that possible?

Profits can include non-cash expenses, like depreciation and amortization, and goodwill write-offs.  A business can be technically “profitable” but have a cash shortfall. 

If profits reflect sales made on credit, the company could experience a cash shortfall during the period between billing and collection.  The company would need enough cash to fund operating expenses while waiting for receivables to arrive.

In an expanding business, cash becomes even more vital.  It’s possible for a high-growth company to “grow yourself into bankruptcy.”

As sales increase, you’ll need more inventory to avoid turning away customers.  If you need to pay for this inventory within 30 days, but receivables from customers buying on credit won’t arrive for 60-90 days, your cash resources might not permit you to sustain your growth.

The situation will be exacerbated if your growth requires hiring more employees or incurring other short-term expenses.

Don’t confuse profits with a healthy business.  A cash flow statement provides a more accurate picture of business stability.  It will show if the company has enough cash to sustain operations during slow periods or while awaiting receivables.

Here are some best practices for improving your cash flow.

Use accounting software

benefits of a financial advisor

With the guidance of your CPA, consider an online accounting package.  Some leading ones are Xero, Zoho Books, FreeAgent, and Quickbooks. Using the right accounting package will improve efficiency and help shorten the time between billing and collection, including automatically scheduling vendor and invoice payments and reminders.  You’ll also benefit from having a clearer picture of your inventory requirements and the ability to generate professional-looking financial statements.

Shorten receivable terms

Cash flow should be uppermost in your mind when making sales.  You can ask for partial payment when your customers place an order or offer a discount for paying in full more quickly.

You can also add a penalty for late payment to reduce the risk of delays.

Consider factoring

With invoice factoring, you sell most of the value of an unpaid invoice to an “invoice factor” and receive immediate payment, which is less than the total value of the invoice.

You can read about the different types of invoice factoring here.

The benefit of invoice factoring is quicker payment, which improves cash flow.

The major disadvantage is the cost charged by the invoice factor.

Lengthen payable terms

Your strategy with payables is different from receivables.

You want to speed up receivables and slow down payables.

Talk to your suppliers about extending the time when payment is due.  If you are a good customer, they will be eager to keep you happy.  Large companies have access to capital that permits them to extend payment terms for valued customers.

Investigate whether it makes sense to make purchases using a business credit card, which may give you a longer time to remit payment.

Check your spending

Expenses reduce cash flow.

Look for ways to reduce your expenses.

There was little to like about the Covid-19 pandemic, but it did have a silver lining.  Many companies found they could reduce or eliminate their need for office space by having employees work remotely. 

If possible for your company, discuss extricating from your lease with your landlord or subleasing unused space.

Your savings transcend rent.  You will also reduce utilities and insurance expenses, including incidental costs like office cleaning.

Make expense management a priority by reviewing and eliminating unnecessary expenses monthly.

Consider leasing

There are pros and cons to leasing instead of buying your equipment.

The primary benefit of leasing is the reduction in upfront costs, which will improve your cash flow.

Leasing may also reduce maintenance costs, increase your deductions and eliminate the possibility of getting stuck with obsolete equipment.

Of course, there are negatives.

Your total costs may be higher.

You lose the depreciation deduction you would have if you owned the equipment.

The equipment won’t be considered an asset on your balance sheet and can’t be used as collateral for financing.

Raise prices

saving vs. investing

While you don’t want to scare away customers, evaluate whether raising prices is appropriate while preserving your competitive position.

At Aura Wealth, we are certified public accountants and financial advisors.  We help our business clients manage and track their cash flow.  We prepare and file their tax returns.  We also provide many additional services, including investment management, setting up retirement plans, and retirement planning.