Cash shortages can limit your ability to grow your business or, in the worst case, make it impossible to keep your business operating. Fortunately, cash flow management software can help you avoid detrimental cash shortages.
In this article, we’ll take you through the common causes of cash flow shortages and how cash flow tools for small businesses can help you maintain healthy cash flow.
What is Cash Flow?
Cash flow is the difference between a business’ cash inflows and outflows. Cash inflow is the cash coming into a business, such as sales revenue, returns on investments, and tax refunds. Cash outflow is the cash going out of a business, including salaries, rent costs, and loan payments.
Many business owners look only at profit, but cash flow is a crucial metric because it shows the overall financial health of a business and its ability to pay financial obligations. Cash flow forecasts can also help business owners determine if they will have enough cash on hand to expand their business.
Common Causes of Cash Shortages
Some of the most common causes of cash flow shortages include:
- Late payments by customers
- Low sales
- Overstocking inventory
- Uncontrolled growth
- Lack of debt collection process
- Poor budgeting
Features of Cash Management Software
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Integration with Other Accounting Software
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Cash Flow Statements and Forecasts
With cash flow software, you can create cash flow statements that show your current cash flow situation and forecasts that help predict future cash flow.
Scenario Forecasting
Scenario forecasting can help you plan for multiple cash flow scenarios. For example, you can predict how your cash flow is affected by an increase in supplier prices.
Customer Insights
Cash flow software can also provide insights into which customers routinely pay on time and which customers miss payments. This can help you focus more on customers who contribute to healthy cash flow.
Planned vs Actual Cash Flow
Cash flow software can compare your actual cash flow with your previous forecasts. This can help you identify errors in your forecasting and improve the accuracy of future forecasts.
Strategies to Avoid Cash Shortages
Creating a detailed and realistic budget is the first step in avoiding cash flow shortages. Use cash flow tools for small businesses to account for all expenses, including often overlooked expenses like maintenance costs and taxes.
Sales revenue is your biggest cash inflow. Use key performance indicators to monitor and improve sales revenue, ensuring you have enough cash coming in to avoid cash shortages.
Leveraging Financial Management Software
Most businesses try to be optimistic when forecasting cash flow, but planning for worst-case scenarios can help you be more realistic and create budgets that help you avoid cash flow shortages. Cash flow software comes with scenario forecasting tools that forecast cash flow in your worst-case scenarios.
Cash flow apps for small businesses also make it easy to compare planned versus actual cash flow. Cash Flow Frog syncs with accounting platforms like QuickBooks, so as soon as your actual cash flow is updated, you can compare it with forecasts.
Best Practices for Cash Flow Management
Effective cash flow management requires consistent monitoring of cash flow. Review your expenses regularly and minimize them when possible. Monitor your inventory levels to prevent overstocking and negotiate with suppliers to keep inventory prices down.
For cash flow forecasting to be effective, you must use high-quality data. Establish data collection methods across your organization and ensure that information is relevant and accurate. Review your accounts for duplicate or missing cash flows.
Use software that gives insights into customer behavior. Avoid customers who regularly miss payments and focus on your best customers who routinely pay on time.
In Conclusion
Common causes of cash flow shortages include low sales revenue, poor budgeting, late paying customers, and poor debt collection processes. Cash flow apps for small businesses come with a variety of features that can help you mitigate these causes and avoid cash flow shortages.
Cash flow management software syncs with existing accounting programs to create cash flow statements and forecasts based on the most up-to-date information. However, for cash flow software to be effective, cash inflows and outflows must be correct, and all financial data must be relevant and accurate.
