Solopreneur’s Guide to Cash Flow Management: 7 Steps to Financial Stability

Let’s talk about how cash flow management is critical for solopreneurs. Well, crucial for any business of course – but can take out a solopreneur and send them back to working for the man if not careful. Understanding your cash flow is an important step in your business operations. 

First things first, what is cash flow?

Cash flow refers to the money coming in and the money going out in the business – affecting your liquidity. Liquidity is just a fancy way of saying how much cash reserves do you have on hand.

Don’t let the term cash flow confuse you  –  you may never deal in cash, just consider the numbers in your accounts that come in, and then go out.

We’re walking through 7 steps to manage your cash flow, and you’ll hear from a bookkeeper who helps small businesses with their cash flow management on the daily for some added expert opinion.

1. Create a Cash Flow Forecast

Some people call this a budget. I like to call it revenue projections…you do, you – call it what you want to. Here’s what you’ll do with your forecast. 

  • Estimate Inflows: Predict your revenue streams from clients or sales. Be conservative in your estimates. I personally like to add in all current clients and then 50% of my projection estimates when budgeting.
  • Estimate Outflows: List all your expected expenses, including rent, utilities, supplies, taxes, and any loan repayments. Please consider your salary in this too, so many businesses are letting their operating expenses take up any left over and they’re shorting their own income. 
  • Regular Updates: Review and update your forecast regularly to reflect actual revenue and expenses. Twice monthly is my recommendation…although you can stay close with it weekly too.

2. Separate Personal and Business Finances

Must. Do. This. Even if you aren’t making much yet – separate these for clarity. You’ll never be able to make good business decisions if you don’t know the real numbers.

  • Dedicated Accounts: Use separate bank accounts for business transactions – maybe even a different bank altogether. 
  • Clear Boundaries: This separation helps in tracking business expenses accurately and simplifies tax filing. If you’re not sure if it counts as a business expense do a little research.

3. Maintain an Emergency Fund & Plan for Taxes

Just like you do with your personal finances, create an emergency fund for your business – there will be highs and lows and you will need a buffer. Additionally, don’t be naive to the fact that Uncle Sam wants his portion of your revenue, plan accordingly. 

  • Buffer Amount: Aim to set aside at least a few months worth of operating expenses; start with an extra month and go from there, 3-6 months of reserves should set your mind at ease.
  • Accessible Funds: Keep this fund in an easy to access savings account for simple transfers during cash flow shortages.
  • Tax Savings: Regularly set aside a portion of your income for tax payments; even if you don’t yet have to pay quarterly tax estimates, be proactive.
  • Professional Help: Consider hiring an accountant to ensure compliance and optimize your tax situation. An accountant’s job is to know the tax law and help you minimize your tax burden. They should ‘pay for themselves’ with savings.

4. Manage Expenses Wisely & Control Inventory

Just because this is your business budget, not your personal budget doesn’t mean that you treat it as if it’s play money. Be smart about your money management and thoughtful about your product costs.

  • Prioritize Spending: Focus on essential expenses that directly contribute to your business growth. Ask yourself – does this directly impact my revenue? If not…it may not be the right timing for your purchase.
  • Negotiate Terms: Negotiate payment terms with suppliers to improve your cash flow situation…stretch it if need be to keep more cash on hand.
  • Inventory Management and Analysis: Avoid overstocking by maintaining an optimal inventory level. It may take time and seasons to begin to figure out what optimal is for your business. 

5. Invoice Promptly, Offer Incentives & Monitor Accounts Receivable

It’s not enough to ask for the payment, you need to follow up and keep an eye on the back end of your business and cash flow.

  • Discounts: Provide small discounts to clients who pay early or pay in full.
  • Late Fees: Implement late fees to encourage timely payments.
  • Timely Invoicing: Send out invoices immediately after completing a service or delivering a product. If there is opportunity to automate or offer subscription style, predicable payments do so.
  • Follow-Up System: Implement a system to remind clients of pending payments and follow up regularly – again technology can help here as well.  Which leads us to #6 quite nicely.

6. Leverage Technology & Seek Professional Advice

You don’t have to do it all alone. Use tools, tech and others to get assistance on the things that are not in your sweet spot.

  • Accounting Software: Use tools like QuickBooks Online, Xero, or FreshBooks to track income and expenses.
  • Automate Invoices: Automate invoicing and payment reminders to reduce administrative burden. Set and forget it, let the tools do the hard work.
  • Professionals: Consult with bookkeepers or accountants to get tailored advice.

Speaking of which…here’s Diane Grant with Saving Time Bookkeeping sharing her practices for using technology in conjunction with a bookkeeper for your small business.

Here’s what the professional bookkeeper had to say:

Choose software that can grow with your business.

Consulting with your CPA or bookkeeper will be a best first step, many will have a preference for your bookkeeping needs depending on the features you need, (invoicing, payroll, inventory management, etc.)  You’ll want some advice on choosing the correct software, one that serves your needs, keeping track of your business, and for the needs of your CPA for tax preparation purposes. 

Accounting technology today can provide insights to your business like never before, cash flow projections, tracking revenue and expenses and making your bookkeeping work smarter for you. 

There are so many automations and integrated apps available today, utilizing some of these automations can be your best “new employee”!

  • CRM services 
  • Invoicing and ability for clients to “click to pay” your invoice 
  • Bill payment services 
  • Time tracking
  • E-commerce imports 
  • Automated payroll and payroll reporting
  • Automated import of bank transactions

Other advantages to accounting technologies:

  • Automatic secure backup
  • Ease of reconciling accounts
  • Ability to customize reports to fit your needs
  • Automate financial reports weekly, monthly or quarterly
  • Email reports to your bank, accountant or board members
  • Compliance with latest tax laws and regulations

Make sure the accounting software you choose has the amount of  “team users” you need.  How many employees will be allowed to access the books and can the software limit what they can see?  Also, make sure you have third party user access for your accountant or bookkeeper.  

Want to talk books with Diane? She can be reached at [email protected] or www.savingtimebookkeeping.com 

7. Diversify Income Streams

One of my favorite discussions with small business owners is how to diversify income streams. Let’s put your eggs in a couple of baskets – not just one.

  • Multiple Sources: Explore different revenue streams to reduce dependency on a single source of income. This can look a lot of different ways, and can sometimes come with a bit of shiny object syndrome – be careful and just pick a couple of ways to diversity to start.
  • Passive Income: Consider passive income opportunities that can provide steady cash flow with minimal ongoing effort. Yes, please! The options that take less of your time are worth their weight in gold.

The Profit First methodology is my favorite way to help small business owners manage their cash flow, and the practice that I use myself. Like the envelope system for your business…in bank accounts – ensuring that you don’t ‘overeat’ your operating expenses and always remain profitable and planning ahead.

Sarah is a Ramsey Preferred Coach
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