Of the many things that can be challenging in today’s economy for small businesses, cash flow is right up there in the top ten. In this post, we’ll discuss various strategies, methods, and things to keep in mind, so that you can shore up your cash flow.
What is Cash Flow and Why Is It Important for My Small Business?
Cash flow is the money coming in and going out of your business at any given time in its operation. The money coming in is referred to as “cash inflow”, and it comes from client payments, loans, equity financing, and savings. The money going out, “cash outflow”, is the money you spend on materials, operating expenses like rent and employees, and investments in new tools, machinery, or whatever it is that will improve your business. Obviously, the goal is to have a positive cash flow and, preferably, a high positive cash flow. Seems pretty simple, right? Well, unfortunately, it’s not.
Have you ever driven by a business that looked to be running smoothly with lots of customers and clients parked in the parking lot and then two months later you drive by and it’s out of business? Chances are it was because of a cash flow problem. Many healthy businesses have succumbed to cash flow issues. Without a cash flow, you can’t invest in new things, pay employees, or secure a line of credit or financing. In fact, according to a study by U.S. Bank, 82% of small businesses fail because of problems related in some way to cash flow.
What are the Root Causes of a Lack of Cash Flow?
There are three big issues for small businesses...
Customer Payment: Especially for businesses that provide expensive services, such as refurbishing kitchens, is customer payment. You can’t pay your bills if your customers don’t pay their bills first.
Inventory: Some businesses require a large inventory and it can be a while until you can sell off the inventory. If you didn’t purchase the inventory on credit, you’ll be on the hook for a large cash outflow.
Expansion: Building a new location can tie up a massive amount of funds and cash flow for an extended period of time, and new locations typically won’t be profitable for months.
There are tons of reasons cash flow can be held up, so it’s important to manage it properly.
What are Common and Useful Techniques for Managing Cash Flow?
Have a Plan
Everything in business revolves around planning and organization. It is crucial to have a plan when it comes to managing cash flows. You should be looking at all your expected expenses for the month and all your sources of cash flow (expected sales, loans, lines of credit, etc.). Expected expenses include rent, insurance, interest payment, utilities, the price of paying for employees, materials, and everything you can think of that your business needs and that will cost money. This is not the time to predict booming sales either. What will the minimum number of sales be? Will you be able to survive if those are the only sales you meet?
To organize all of this information, you should make use of an excel spreadsheet. There are a number of different ways to organize the information within a spreadsheet, so spend some time researching different looks and methods to find one that makes sense and is easily understandable for you.
Incentivize and Tighten Up Customer Payments
Customer payment issues are a huge problem for small businesses, especially ones that provide long term services, such as home remodeling or deck building. Profits are not the same as cash flow. Just because you sold $15,000 worth of your services this month does not mean you have $15,000.
How do you get more of this money faster? Well for one tighten up your contract lengths and charge late fees. Sure, it would be nice to give customers 60 days to pay for a service, but can you afford to do that, and do they really need that much time? Many times, the answer is no, so shorten your contract to 30 days. Then on top of that, offer a 5% discount if payment is made within 5 or 10 days. Since odds are you won’t get any business if you require all customer to pay within 5 days for a long-term project, the key is incentivizing prompt and expedient payment, not requiring it.
Is your business the kind that can require down payments? If so, you should. This will bring in some immediate cash upon the sale of your services and help right away with increasing your cash flow.
Don’t Be too Eager to Pay Your Bills
It’s obviously important to pay your bills, but many times bills give you 30 or more days to pay them. You don’t benefit at all by paying them right away. Sure, it’s nice to get the weight off your chest and have them paid, but it’s unnecessary and reduces your cash flow. If you’re worried about missing a payment, set up an electronic funds transfer (EFT) payment.
But if it’s a supplier bill and they offer a discount for early payment, then you need to weigh your options carefully depending on the state of your business and cash flow at the time. Will you have a larger cash flow 15 days from now? Then maybe it makes sense to wait in case any big costs come down the pipeline.
Try Not to Zero Out
A net cash flow of zero is not a good thing. You always want to have something saved in case some unexpected expenses appear. Keep your spreadsheet organized and make try to ensure what’s coming in exceeds what’s going out.
Should you run into any problems with your cash flow and have outstanding invoices that you need but which won’t be paid for 30 to 60 days, consider invoice factoring. It is not the most ideal of options but could be what saves you when you are in a pinch.
Invoice factoring is when a business sells its account receivable, also known as invoices, to a third party, for a discounted price. The third party will pay you right away, and then when the customer pays, the payment will go to the third party.
Rather self-explanatory but definitely not something that you should rely on. As we already mentioned, you should always expect the bare minimum of sales when factoring and accounting for your cash flow. But at the end of the day, boosting sales is what increases cash flow and grows businesses. To do this, consider attending small business trade shows, using impactful marketing strategies, such as contests and promotions, and reaching out to your customer base through ads and engagement on social media. Anything you can do to help boost sales is positive for your cash flow and your business.
As always, if you have any questions, don’t hesitate to reach out and make sure to check back for more posts on how you can expand, strengthen, improve, and optimize your small business.