Manage cash flow

Money in, money out. That's the nature of cash flow. The pattern of money coming into and going out of your business will influence (if not determine) whether you stay in business. You should regularly review your account when you expect to receive money and when you expect to pay out money. Your diligence will help you determine how to sufficiently balance and manage your cash flow.

Review these key accounts every month or at least a couple of times each year to understand your cash flow:

    * Accounts receivable
    * Accounts payable
    * Inventory
    * Credit terms under which you sell goods and services to customers
    * Terms used to purchase materials from suppliers

An understanding of how these accounts relate to one another will help you identify potential problems and keep cash flowing more smoothly. Use a spreadsheet program to calculate the amount of cash that you'll have on hand based on your estimate of when you'll receive income and when you'll incur related costs. Take advantage of the many financial and accounting templates for Microsoft Office Excel 2003 that are available on Microsoft Office Online at http://office.microsoft.com.

Tips for keeping cash flow fluid

Because you can be sure that you'll always have cash flowing out — such as for rent, inventory purchases, and fees — you need to set up processes that keep cash flowing in as well. Follow these techniques to keep your incoming cash flow constant:

    * Invoice promptly   Don't wait until the end of the month to send out all of your invoices. Say that you make a sale on June 3 that is payable 30 days from the date of the invoice. If you wait until June 30 to send the invoice, you've added nearly a month to the time frame for being paid.

    * Provide payment incentives   Offer a discount of a few percentage points as an incentive to customers to pay their invoices early — say, 10 to 14 days after the sale rather than 30 days.

    * Request down payments   Ask for payment of a portion of the work you plan to do or the goods you'll deliver as part of the initial order. You can put that money to use while you complete the rest of the work or the delivery.

    * Respond to past-due payments   Act quickly to collect amounts that are past due. Document your request for payment with letters or faxes. In your correspondence, specify the steps that you'll take if payment isn't received, including turning the account over to a collection agency.

Remember that some people love to manage money. They do it professionally. You need to consider whether your time as a small business owner is well spent on balancing your own books or whether you should entrust that job to someone else. However, you may not be able to afford a bookkeeper or an accountant from the beginning, and that's where the use of one or more of the financial and accounting templates on Office Online can help. The basic task is to keep on top of your financial records — regardless of who keeps your books — so that you have a realistic understanding of how well your business is doing.

About the authors   Adapted from Microsoft Small Business Kit by Joanna L. Krotz, John Pierce, and Ben Ryan. Visit Microsoft Learning to learn more about this book and its authors.

Business Financial Services

Manage cash flow