Cash flow problems are no stranger to many entrepreneurs. Whether you’re starting a new business, or you’re facing a rough patch in an established business, proper financial planning can go a long way towards keeping your books straight, and ensuring that you always have enough money to make payroll, buy inventory, pay vendors, and keep the lights on at home.
A finance-conscious small business owner is always aware of his or her business’s projected cash flow over the coming weeks and months. But knowing what cash you’ve got coming in – and what bills you have to pay – isn’t the whole story. You can take steps to encourage repeat business and prompt payment of invoices, so that cash comes in consistently. You can also make sure to have a reserve of cash on hand, or a business line of credit at your disposal, so you’ll have something to fall back on during those times when cash flow problems inevitably do arise.
Know Your Cash Flow Situation
Whether or not you’re already in treacherous financial territory, your first step towards managing business cash flow is making sure you know your current situation inside and out. Prepare cash flow projections for your business for the next quarter and the next year.
To do this, add up all the cash you expect to have or receive at the beginning of the period in question. This can include any cash you’ll already have lying around when the period starts, as well as cash you receive from all sources, including customer payments, service fees, debt collections, interest earnings, and other payments.
Now, figure out what you’ll have to spend during the projection period, and when you’ll have to spend it. You’ll need to be able to account for each red cent of your cash outlays, specify a date for those outlays, and predict the reason for them. Make each of your business expenses a line item on your cash flow projection. Expenses that you might need to account for in your projection include:
• Payroll
• Rent
• Any inventory items purchased with cash
• Equipment purchase, leasing, maintenance, and fuel
• Benefits paid
• Taxes withheld, including sales tax
• Cash dividends paid to investors
• Professional and service fees
• Utilities
• Office supplies
• Payment of debts
• Advertising costs
• Vehicle maintenance and fuel costs
Once you’ve finished your projection, you’ll know exactly where your business stands financially. You’ll know how much money you need to make, and by what dates you’ll need to make it, in order to meet your financial obligations to employees and vendors and stay afloat.
Control Cash Outlays
Cash outlays are an inevitable part of running a business, but by juggling them properly, you can keep cash in your business longer. One of the most important things you can do to control cash outlays and manage your cash flow is to take advantage of net 15, net 30, and net 60 payment terms in vendor contracts.
Take all the time you have to pay your bills, without breaking the terms of your service contract. Pay bills electronically on the last day they’re due, unless the vendor is offering you a significant discount for early payment. While paying bills when they’re due can help you keep cash in the business, taking advantage of an early payment discount may reduce your business’s overall operating costs, helping you manage cash flow in another way.
Keep Cash Coming In
Now that you know your cash flow situation more intimately, you can start taking steps to keep cash coming in consistently. It’s a good idea to keep some ready cash reserves on hand, so that you can keep buying inventory and making payroll during lean times. Many business owners also use a business line of credit for this purpose, but it’s best to open one when you don’t need the money. Lenders are less willing to loan to businesses that are struggling financially.
One of the most effective ways to do this is to encourage prompt payment of invoices or repeat business from customers. Minimize net 15, net 30, and net 60 terms in your contracts as much as possible, or if you can’t, ask vendors and customers to make a deposit when they place an order. Offer discounts for early payment to encourage customers to pay quickly, or if you offer products or services that lend themselves to bundling or subscription sales, try these to encourage repeat business.
Make sure to stay on top of unpaid invoices. Send invoices as soon as services are rendered, and keep track of who owes you money. Encourage late-paying customers to pay with a discount for prompt cash payment, but consider instituting a cash-on- delivery policy with customers who have been late with payments in the past. If tracking invoices and chasing slow-paying customers is too much for you, consider using a factoring company to get cash for your unpaid invoices promptly and pass on the burden of collecting payment to someone else.
Managing small business cash flow can at times seem overwhelming, especially because there will always be times when cash just doesn’t come in as fast. With some fancy financial footwork and careful planning, however, you can weather lean times to help your business grow year after year.
I hope you enjoyed this article about how to manage cash flow in your small business or startup.
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