Managing cash flow effectively is a common struggle for many small businesses.
Luckily, Xero offers features to optimize your cash flow, improving financial health and stability.
In this guide, you'll discover best practices for invoicing, bill payment, cash flow forecasting, securing capital access, and monitoring using Xero's powerful accounting tools. With proactive financial management, you can reach your business goals through optimized cash flow.
Mastering Cash Flow Management in Xero
Effectively managing cash flow is critical for any small business. It ensures you have enough funds on hand to cover operating expenses, make payroll, and invest for the future. However, many small businesses struggle with cash flow due to issues like late customer payments, seasonal revenue fluctuations, and inaccurate financial projections.
Using accounting software like Xero can help simplify cash flow management. Key benefits include:
- Real-time visibility into cash flow position based on up-to-date data on accounts receivable, accounts payable, profit and loss statements, and more
- Automated invoicing and reminders to get paid faster by customers
- Integrations with payment gateways to easily accept online payments
- Reporting and analytics to create cash flow forecasts based on historical cash flow trends
- Expense tracking to control costs
- Managing bills to take advantage of early payment discounts
With the right discipline and tools, small businesses can master cash flow management in Xero. This includes creating 90-day cash flow projections each month based on sales forecasts and predictable expenses. Businesses should also optimize customer invoice payment terms to get paid as quickly as possible. Finally, business owners should continuously monitor cash flow KPIs in Xero like the current cash balance, accounts receivable turnover, net operating cash flow, and cash conversion cycle.
Strong cash flow management disciplines combined with a tool like Xero can help small businesses improve financial control and better plan for the future.
How do you ensure a healthy cash flow?
Here are some best practices for small businesses to manage their cash flow effectively:
Monitor Cash Flow Closely
- Use accounting software like Xero to track cash inflows and outflows in real-time
- Review cash flow reports frequently to spot trends and issues early
Make Cash Flow Projections
- Create a 12-month cash flow projection during annual planning
- Update projections monthly based on actuals to keep forecasts accurate
Identify Issues Early
- Review aging reports to catch late customer payments
- Analyze expenses to identify areas of overspending
Understand Basic Accounting
- Learn essential concepts like working capital, profit margins, etc.
- Set key cash flow ratio benchmarks to maintain
Have a Backup Plan
- Secure a business line of credit for unexpected shortfalls
- Build up emergency savings to cover 3-6 months of expenses
Grow Carefully
- Balance growth plans with cash flow capabilities
- Prioritize opportunities with fastest payback
Invoice Quickly
- Send invoices immediately after delivering services
- Automate recurring invoices for efficiency
Use Technology Wisely
- Automate billing and payments to accelerate cash cycle
- Integrate systems to eliminate manual processes
Monitoring cash flow frequently and projecting future cash positions will help businesses identify issues early and make adjustments to improve financial health. Having a backup plan and emergency funds also provides a safety net for unforeseen circumstances.
How can you manage cash flow more efficiently?
Managing cash flow efficiently is critical for any business. Here are some tips to improve cash flow management:
Choose and use the right tools
There are three main types of tools that can help with cash flow management:
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Accounting software like Xero can help you:
- Prepare cash flow projections to forecast future cash needs
- Track bills and payments to avoid late fees and interest charges
- Monitor unpaid invoices to follow up on overdue payments
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Cash flow planners and dashboards provide visibility into cash flow and allow you to:
- Build cash flow forecasts based on revenue and expense projections
- Track short-term cash on a weekly or monthly basis
- Identify peaks and valleys in cash availability throughout the year
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Online invoicing and payment tools enable you to:
- Create professional invoices with clear payment terms
- Send invoices and accept online payments quickly
- Reduce the time customers take to pay invoices
Implement tight credit management
You can optimize cash flow by ensuring customers pay on time. Steps to take include:
- Establish clear and standardized payment terms on all invoices
- Offer incentives for early payment
- Send payment reminders as invoices become due
- Charge late fees on overdue invoices
Control expenses
Look for opportunities to control expenses by:
- Tracking where money gets spent
- Prioritizing essential expenses
- Negotiating discounts from vendors
- Finding less expensive alternatives
Careful cash flow management ensures you have enough cash on hand to operate smoothly. Leveraging the right tools and techniques allows you to optimize financial health.
How can improving your cash flow help you reach your financial goals?
Improving cash flow can help businesses reach their financial goals in several key ways:
Reduce Debt and Interest Payments
With positive cash flow, businesses can pay down debts faster and reduce expensive interest payments. This frees up cash that can be invested back into the business for growth.
Establish Financial Stability
Steady cash flow allows businesses to reliably pay employees and vendors on time. This financial stability retains talent, maintains good relationships with suppliers, and boosts the company's creditworthiness.
Pursue New Opportunities
Adequate cash reserves give businesses flexibility to explore new projects, hire staff, upgrade technology, and enter new markets. This enables strategic growth rather than limiting decisions based on cash restrictions.
Gain Financial Independence
Sufficient cash flow and liquid reserves reduce reliance on loans and investments from outside sources. Businesses can become self-sustaining and have greater control over their financial destiny.
In summary, when businesses improve cash management through better invoicing practices and cash flow forecasting in Xero, they directly strengthen their financial health. This enables both short and long-term business goals related to debt reduction, stability, strategic growth, and financial independence.
How can a cash flow situation be improved?
Improving cash flow can be challenging, but taking some proactive steps can make a big difference. Here are some practical tips:
Set up recurring client payments
Rather than relying on clients to remember to pay invoices, set up automatic recurring payments. This provides predictable income streams to better manage cash flow. Many accounting software programs like Xero allow you to create repeating invoices and integrate with payment processors.
Renegotiate payment terms
If you offer net 30, 60 or 90 day payment terms, see if clients can pay more quickly, even net 15. Offer a small discount for faster payments or late fees for slower payments. This incentivizes clients to pay sooner.
Invoice immediately
Don't let invoices pile up. Invoice as soon as work is completed to get paid faster. Set calendar reminders to ensure invoices go out on time. The sooner you bill, the sooner you can get paid.
Review sales contracts
For new clients, require partial or full payment upfront instead of waiting 30+ days for the entire payment. Build this into sales contracts and proposals.
Trim expenses
Review non-essential expenses that can be reduced or cut out entirely to preserve cash flow during slower periods. Look at subscriptions, software, payroll, contractors etc.
By optimizing billing cadence, negotiating better terms, requiring deposits and reducing operational expenses, you can take control of cash flow. Consistent monitoring and adjustments ensures a healthier financial situation over time.
Analyzing Cash Flow Statements in Xero
Automating Bank Feeds for Real-Time Data
Connecting your bank accounts and credit cards to Xero allows transactions to automatically flow into the appropriate accounts in real-time. This provides up-to-date information to generate cash flow reports and forecasts.
To set up bank feeds in Xero:
- Navigate to Bank Accounts > Add bank account
- Search for and select your bank
- Enter your online banking credentials to connect your accounts
With bank feeds set up, Xero will automatically import new transactions daily, saving you time on manual data entry. Real-time data leads to more accurate cash flow tracking.
Creating a Cash Flow Forecast
Xero's cash flow forecast tool lets you predict future cash positions based on historical cash flow trends. To generate a forecast:
- Go to Reports > Cashflow Forecast
- Select a date range (e.g. next 12 months)
- Choose the accounts to include
- Customize assumptions on sales, expenses, etc.
- Run the report
Review and adjust the forecast as needed to have an up-to-date prediction of cash inflows/outflows. This helps guide financial decisions to optimize cash flow.
Understanding Liquidity and Working Capital
Cash flow statements also provide insight into key health metrics like liquidity and working capital:
- Liquidity measures the ability to pay short-term debts. The higher the liquidity, the better positioned to handle unexpected cash shortfalls.
- Working capital indicates if current assets can cover current liabilities. Positive working capital means a company has enough to fund operations without taking on more debt.
Monitor these over time to assess financial durability. Dips may warrant investigating ways to improve cash flow management.
Identifying Patterns and Seasonal Trends
Analyzing historical cash flow statements can reveal patterns tied to business cycles, promotions, tax seasons, etc.
- Plot cash flow by month over several years to highlight recurring peaks and dips
- Determine causes behind major fluctuations
- Factor expected effects into future cash flow forecasts
Building seasonal expectations into projections allows better cash flow planning and preparation.
In summary, Xero provides real-time cash flow data plus tools to generate forecasts and monitor working capital and liquidity over time. Analyzing statements for trends and patterns informs decisions to optimize financial health.
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Optimizing the Invoicing Process in Xero
How to Invoice: Best Practices in Xero
Creating professional invoices in Xero with clear details can help ensure timely payments and improved cash flow for your business. Here are some best practices:
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Include all necessary invoice details - date, invoice number, payment terms, itemized list of goods/services provided, total amount due, and payment instructions. This avoids confusion or delays.
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Set up invoice templates and recurring invoices in Xero to save time. Just update the details each billing cycle.
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Send invoice notification emails through Xero to remind clients and provide an easy payment link.
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Use Xero's tracking to see when invoices are opened to know they've been received. Follow up if you don't receive acknowledgment.
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Download invoices as PDFs from Xero to include as attachments for a professional look.
Setting Clear Invoice Payment Terms
Undefined or confusing payment terms can lead to late payments and cash flow issues. Make sure to clearly communicate:
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Due date - Be specific, e.g. Net 30, Net 15, or set a calendar date. Avoid vague terms like "Due upon receipt."
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Late fee policy - Will you charge interest on late payments? Spell it out upfront.
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Accepted payment methods - Online, check, bank transfer? Detail the methods available and preferred.
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Early payment incentives (optional) - Consider small % discounts for paying early. This encourages faster payments.
Revisit your standard Xero invoice payment terms and optimize them for your business. The clearer you are upfront, the fewer payment issues down the line.
Managing Late Payments Proactively
Despite good intentions, customers still pay late from time to time. Here are proactive ways to address late payments in Xero:
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Automate reminders for 1 week before due, day of due date, and each week payment is outstanding. This takes the awkwardness out of asking.
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Personalize reminder notes in Xero with a friendly but urgent tone. Show you rely on their business.
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Check invoice status in Xero frequently. Reach out to confirm if payment was sent or if there are issues.
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Offer easy online payment through integrated systems like Stripe or PayPal upon reminder. Include the link in emails.
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Be willing to negotiate - Offer reasonable extended terms or payment plans if needed to preserve the relationship and avoid write-offs. Get something rather than nothing.
Accepting Online Payments for Efficiency
Integrating online payments with Xero streamlines invoicing and makes it easier for customers to pay on time. Benefits include:
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Faster payments - Online payments are more convenient for customers and typically paid quicker.
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Payment notifications in Xero when online payments are made, keeping cash flow visibility up-to-date.
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Automatic reconciliation of payments in Xero rather than manual data entry.
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Professionalism - Customers perceive businesses with online payment abilities as more established.
Consider solutions like Stripe, Authorize.Net, or PayPal integrated with Xero. Accepting online payments reduces administrative tasks while getting you paid faster.
Effective Bill Tracking and Payment in Xero
Organizing and Tracking Small Business Bills
Effectively tracking bills is critical for small business cash flow management. Xero makes it easy to organize and track bills by allowing you to upload bills directly or forward them to a unique email address Xero provides. The bills are automatically added to Xero for tracking.
You can add key details to track for each bill, including due dates, total amounts owed, payment terms, early payment discounts available, and the appropriate expense or supplier account to categorize it. Xero keeps all this bill information organized in one place so you can monitor cash outflows and prevent late fees.
Regularly reviewing upcoming bills due and setting payment reminders ensures you pay bills on time. Xero has calendar features, reminders, and reporting to help stay on top of payments. Tracking bill due dates alongside your cash flow forecasts enables better cash flow control.
Strategic Bill Payment Scheduling
In Xero, you can schedule bill payments on specific dates that align with your projected cash inflows and business cash flow cycles. This prevents overdrafts or cash shortages.
For example, if you have a major client payment due on the 25th of the month, you could schedule bill payments on or just after the 25th to utilize this incoming cash. Scheduling payments strategically like this is key for maintaining a healthy cash balance.
You can also take advantage of supplier payment term discounts by scheduling payments just ahead of discount deadlines rather than the full due dates. This helps optimize cash outflows.
Leveraging Early Payment Discounts
Paying bills early can help secure supplier discounts, improving profit margins and cash savings.
Within Xero, you can view discount percentages and time windows available for early payment of bills. You can then schedule payments accordingly to maximize discounts and accumulate small cash flow gains over time.
Setting up payment rules can help automate this. For example, you could create a rule to pay bills from a certain supplier as soon as possible if an early payment discount of 5% or more is available.
Automating Payment Rules to Control Expenses
Xero allows you to create customized automated payment rules to help control cash outflows. This ensures bills get paid on time, preventing late fees, and gives you more control over cash flow.
Some examples of automated payment rules include:
- Pay bills as soon as possible if early payment discounts above a chosen threshold are available (e.g. 5%)
- Pay bills on a set schedule (e.g. 7 days after the bill date)
- Pay bills on a fixed date each month (e.g. 1st and 15th)
- Only pay bills when a certain amount is available in your bank account to prevent overdrafts
These types of automated rules take the effort out of manually scheduling payments each time. This saves administrative costs and minimizes the risk of missing discounts or payments. By linking the rules to your cash availability, forecasts, and projections, you can stay in control of expenses.
Automation, tracking, and scheduling bill payments in Xero provides better cash oversight to improve financial health. Monitoring your accounts payable alongside income and banking data is crucial for effectively managing your small business cash flow.
Forecasting for Short-Term Cash Flow Needs
Cash flow forecasting is essential for small businesses to manage liquidity and ensure they have enough cash on hand to cover short-term financial needs. Xero provides tools to create accurate cash flow projections based on historical data and different scenarios.
The Basics of Cash Flow Forecasting in Xero
Xero's cash flow forecast feature allows you to:
- Import historical cash flow data from bank feeds and accounting transactions
- Project future cash inflows from sales invoices and outflows like bills
- Model different scenarios like best/worst case projections
- Identify potential cash shortfalls or surpluses
This helps small businesses predict short-term cash positions. By forecasting 30/60/90 days out, businesses can take steps to improve cash flow if a shortfall is expected.
Utilizing Historical Data for Accurate Projections
The key to reliable cash flow forecasting is leveraging real historical data within Xero. This includes:
- Bank transactions - imports data like customer payments
- Invoices - shows timing/amounts of customer invoices
- Bills - imports supplier bills to predict outflows
By analyzing trends from this data, Xero can accurately predict future cash flow within a 30/90 day horizon based on seasonal patterns and averages. This prevents relying solely on estimates.
Regularly reconciling bank transactions in Xero also improves data accuracy for better projections.
Scenario Planning for Financial Preparedness
Within the cash flow forecast tool, Xero enables modeling different scenarios to stress test small business finances. This includes:
- Best case - projects cash flow based on best case assumptions like customers paying invoices early.
- Worst case - models cash flow if customers pay late or projected sales fall short.
By forecasting different scenarios, small businesses can identify potential cash shortfalls in advance and have contingency plans to bridge gaps. This kind of scenario planning improves financial resilience.
What is Free Cash Flow? Understanding its Role
Free cash flow represents the excess cash a business generates after accounting for regular operations and capital expenditures. In the context of cash flow forecasting, monitoring free cash flow helps businesses identify extra liquidity that can be used to repay debt, invest, or keep as an emergency fund. Taking steps to improve free cash flow - like collecting from customers faster or negotiating better supplier terms - directly helps strengthen everyday cash flow management.
Securing Financial Health with Capital Access
Maintaining consistent cash flow is critical for any business. When cash flow gaps emerge, it can put financial health at risk. Having access to capital and credit options provides a safety net to bridge those gaps when needed.
Within Xero, businesses can evaluate different funding sources to find the right mix to support their operational needs. Understanding the options available and how to utilize them effectively is key to securing financial health over the long-term.
Exploring Credit Options for Cash Flow Gaps
Cash flow fluctuations are normal in business. Seasonal dips in revenue, unexpected expenses, and timing issues with client payments can all contribute to temporary shortfalls. Rather than scrambling each time this happens, having access to credit provides stability.
Some options to consider:
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Business Line of Credit: This revolving credit line allows you to access funds as needed up to a set limit. It works similarly to a credit card, without the high interest rates.
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Merchant Cash Advance: These advances provide a lump sum payment in exchange for a percentage of future credit card or debit card sales over a fixed time. There are typically no credit checks.
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Term Loans: Term business loans provide a large, fixed amount of financing that is repaid in regular installments over 6 months to 5 years. Useful for larger capital investments.
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SBA Loans: The U.S. Small Business Administration guarantees portions of loans made by eligible lenders to qualifying small businesses. Enables access to affordable, long-term financing.
Assessing eligibility criteria and repayment terms for each option in Xero can clarify the best approach when cash gets tight.
Evaluating Funding Mix for Operational Needs
Rather than relying on a single funding source, diversifying across different instruments can provide maximum flexibility. Within Xero, businesses can model how blending options might work to align with operational realities.
For example, combining a small business line of credit to manage everyday cash flow, an equipment loan to upgrade technology infrastructure, and an SBA loan to move into a larger facility can match variable needs. Testing funding scenarios in Xero provides data-driven insights to create an optimal mix.
Monitoring the impact on cash flow and other financial statements over time shows whether adjustments to the blend are prudent. The key is striking the right balance between debt and equity that supports growth without overextending.
Maintaining Creditworthiness for Future Growth
Financial institutions assess creditworthiness based on financial statements, credit scores, collateral assets and other factors. By diligently managing these elements within Xero, businesses can strengthen their financial profile and access to affordable financing options.
Strategies such as closely tracking accounts receivable, keeping debt service coverage ratios stable, limiting new liabilities and consistently meeting obligations help demonstrate creditworthiness. Maintaining timely, accurate financials and projections in Xero provides the documentation required when more capital is needed to fund future growth plans.
Careful financial management maximizes access to capital. Monitoring key metrics in Xero and making adjustments proactively is essential to secure the financing that can propel small businesses forward.
Proactive Cash Flow Monitoring with Xero
Regularly monitoring your cash flow can help prevent issues and contribute to your business's overall financial health. Xero provides useful tools to set up alerts and review your finances routinely.
Setting Cash Flow Alerts in Xero
You can customize alerts in Xero to notify you when key cash flow metrics reach concerning levels. This allows you to stay on top of potential problems before they escalate. Some alerts you may want to set up include:
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Low bank balance warnings - Receive an alert when your account balance drops below a set threshold so you can prevent overdrafts or interruptions.
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Upcoming bills reminders - Get notified a set number of days before bills are due to ensure timely payment.
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Late invoice warnings - Be informed immediately when an invoice passes its due date so you can follow up with clients.
Implementing Routine Financial Reviews
In addition to alerts, building regular financial reviews into your processes is vital for ongoing cash flow visibility. Some best practices include:
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Daily check-ins to review new invoices, payments received, and account balances.
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Weekly cash flow forecasting to predict cash availability for the upcoming months.
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Monthly reconciliations, profit and loss reviews, and tracking cash flow KPIs.
Establishing consistent routines gives you better control and allows you to spot discrepancies quickly.
Adapting Business Strategies Based on Cash Flow Insights
The insights gleaned from proactive monitoring and routine reviews enable data-driven decisions about your finances. If cash flow is consistently low, you may need to reassess your pricing, invoices, or expenses. If a big payment is coming up, you can plan for it with adjustment strategies like:
- Offering payment plans to customers
- Renegotiating payment terms with vendors
- Postponing large purchases
- Reaching out to investors
Regularly reviewing the pulse of your cash flow with Xero puts you in the driver's seat. You can catch issues early and adapt your business strategy accordingly for financial stability.
Conclusion: Solidifying Your Cash Flow Strategy
Optimizing your cash flow is critical for the financial health and growth of your small business. By effectively managing your cash inflows and outflows in Xero, you can ensure you have enough working capital to cover operating expenses while minimizing debt.
Here are the key takeaways for improving cash flow in Xero:
- Create detailed cash flow forecasts to accurately predict your short and long-term liquidity needs
- Manage customer invoices and payments to accelerate receivables and prevent late payments
- Use payment terms strategically by offering discounts for early payment
- Control expenses by tracking bills and payments to vendors
- Assess reports frequently to identify issues requiring intervention
With consistent monitoring and forecasting using Xero's robust accounting tools, you can minimize cash flow gaps and maintain steady liquidity. This will reduce your reliance on external financing and provide flexibility to capitalize on new opportunities.
Focus on continuing to refine your processes around invoicing, payables, and cash flow planning. With real-time visibility and control over your finances, you can confidently manage fluctuations in income and expenses.
