Cash Flow Crisis: How Bookkeeping Can Make or Break You

Even the best managed businesses can run into cash flow problems. Identifying and resolving them quickly is essential.

Revisit your budget monthly and flex spending where necessary. Make it easier for clients to pay you by offering early-payment discounts or allowing payment in instalments and retainers.

Focus on reducing unnecessary expenses. This includes limiting the number of staff and off-loading non-essential equipment.

1. Accounts Receivable

Managing cash flow is all about treading the line between incoming funds and outgoings. The goal is to have more money coming in than going out. However, it’s easy to get carried away and end up spending more than you have coming in. This is why it’s important to have a system in place for monitoring and analyzing your financial health.

Accounts receivable is the amount of money that your customers owe you for goods and services that you have already delivered. It is accounted for in your general ledger under the accounts receivable heading and it shows up on your balance sheet. If you have a lot of accounts receivable, this can be a serious problem for your cash flow.

In a normal operating environment, companies will offer goods and services on credit to their customers. This is a great way to attract new business, but it comes with a cost: the money that your customer owes you will be recorded as an asset in your accounts receivable.

It’s important to keep track of your account receivable so you can monitor when payments are coming in. You can also make sure that your invoices are correct and that you’re capturing all the amounts owed to you. It’s also good practice to make payments of your account receivable as soon as you receive them, and not wait until the due date.

One of the biggest causes of cash flow problems is late payments. This can be addressed by offering early payment discounts or late payment fees to your customers. In addition, it’s a good idea to work with your suppliers to find ways to reduce the risk of late payments by putting in place terms that allow for more time for payment.

Another way to improve your cash flow is to identify products that aren’t selling well and stop bringing them into inventory. This will free up cash that can be invested in other areas of your business. It may also be a good idea to consider whether you could lease equipment instead of buying it, as this will often save you money in the long run.

2. Accounts Payable

During a cash flow crisis, it’s vital to have an accurate picture of what you owe and who you owe it to. This is where accounts payable (AP) comes in. AP is a current liability in your balance sheet, reflecting the amount that your business owes to external suppliers and vendors for goods or services purchased on credit.

When you buy something on account, the supplier typically issues an invoice that includes a detailed breakdown of what was bought and the total cost. In a large organization, this is often the job of an accounts payable department, though smaller businesses may employ a bookkeeping service or accounting software to manage the process.

The accounts payable department ensures that all incoming invoices are paid on time. This is a significant function, as late payments can result in interest charges and strained relationships with loyal suppliers. It’s also essential to make sure that all deductions for cash discounts, rebates and quality defects are recorded accurately and consistently.

A key to good AP management is ensuring that a company’s Purchasing department is aligned with its finance and accounting team. Ideally, the two teams work together to make sure all incoming invoices are approved by both parties, that they are matched up with the correct vendor and that the appropriate payments are made.

It’s also important to monitor cash flow on a regular basis and keep a close eye on any fluctuations. If your cash inflows are greater than your outflows, you’re “cash positive”; if not, it’s time to start making some changes.

Managing a cash flow crisis is never easy, but it can be less stressful with the right books in place.

3. Inventory

Inventory is one of the most important aspects of a direct to consumer or B2B manufacturing business. Keeping track of your inventory isn’t just about knowing how many units you have in the pipeline or how much you paid for each product, it also allows you to manage your supply chain and negotiate flexible payment terms with your suppliers.

Inventory typically consists of raw materials, work-in-process and finished goods. It’s reported as a current asset on the balance sheet and companies can assign the cost of the inventory using methods such as FIFO (first-in, first-out), LIFO or weighted average.

Keeping accurate inventory records can help you reduce wasted stock. A robust inventory management system will allow you to monitor the demand for your products and forecast when it’s time to reorder. It will also give you insights into customer purchasing patterns and reveal any trends that could impact your sales in the future.

Aside from reducing costs, it’s also critical to make your customers’ payments as quickly and smoothly as possible during a cash flow crisis. Putting processes in place to minimise late payments should be the priority. This might mean offering discounts to speed up the process, or encouraging customers to spread payments out over a longer period.

Another way to increase cash flow is to accept pre-orders from customers. As long as you’re able to fulfil the orders in a timely manner, this can be a great way to bring in additional revenue before production starts.

If your company is going through a cash flow crisis, it’s vital that you take steps to prevent it from recurring. The best way to do this is with a comprehensive and effective bookkeeping service . Contact The Bottom Line Bookkeeping to learn more about how they can simplify and streamline your entire accounting process. They’ll show you how implementing even just a few small changes can have big impacts.

4. Payroll

Payroll is the process of paying employees and calculating their gross and net wages. It includes accounting and record-keeping as well as withholding money for taxes, benefits, garnishments, etc. Many small businesses handle payroll in-house, while medium- and large-size companies often outsource the service to a payroll services provider.

For each employee, you need to collect and review their timecards, which record the hours they work during a pay period. These should be reviewed and approved by supervisors before being processed. Once the timecards are processed, you need to calculate each employee’s gross wages and deductions. This includes their federal, state, and local income tax withholdings, as well as FICA (Medicare and Social Security) and unemployment insurance withholdings. Additionally, some employees may receive commission or tips that must be accounted for.

After the wages and deductions have been determined, you must prepare and file payroll tax returns. You must also provide employees with W-2 forms, and some states require submitting quarterly wage reports.

Keeping up with your bookkeeping can help you keep track of payroll costs so that you’re not caught off guard when the bills come due. Taking advantage of a business line of credit is another way to bridge cash flow gaps when needed. This works similarly to a business credit card, but with lower interest rates and the flexibility to pay it back during better months.

Getting your cash flow under control is critical for the survival of your company. If you don’t have enough cash to cover your bills, it’s likely that clients will delay payment or stop working with you. It’s also important to reduce expenses wherever possible, especially for variable costs like shipping and hourly wages. If you can, bill on a weekly basis rather than monthly, and do your best to cut down the time between payments. These are all small changes that can make a big difference when it comes to your company’s financial health.