Cash flow challenges are responsible for the demise of a quarter of all small businesses. Here are some important best practices all small business owners should know to manage cash flow.
Keep your business lean. You can’t maintain complete control over your sales, the competitive environment or even customer loyalty. But you can manage the impact these variables have on your cash flow by keeping expenses as low as possible, without sacrificing your ability to be competitive.
If a portion of your physical space goes unused, for example, you may be able to protect against cash flow strains by renting it to another small business, to offset your overhead costs and generate additional cash.
Use leverage to your advantage. The less cash you put forth to secure inventory or place manufacturing orders, the less cash-stressed you become. Consider creative financing options such as trade financing, merchant cash advances or low-interest lines of credit that empower you to fulfill upfront investments necessary to grow your business — without requiring that you sacrifice your cash flow.
Invoice efficiently. Paper invoicing processes cost your business money for materials such as printer ink, paper and postage, take time to prepare, and introduce delays into the amount of time it takes for you to collect payment. In fact, data indicates that companies with optimized invoicing processes collect 17 days faster than those that do not.
Adopt electronic invoicing processes with the help of electronic invoicing software. There are many low-cost programs that make it simple to email invoices to clients as soon as work is complete, track when an invoice is opened, and send automated reminders when invoices are nearly past due.
Identify slow-paying clients proactively. Requiring payment as soon as services are rendered or before the customer can walk out of your store with an item is simple in a business-to-consumer model. If you sell to other businesses, however, cash flow management is more challenging. Because some customers have non-negotiable payment terms, you may not be able to convince every customer to pay upfront, or as quickly as you’d like.
Proactively identify which clients may be slow to pay at the start of the relationship. If a client has net 30 or net 60 payment terms, for example, require payment for a portion of the work upfront if their standard payment terms indicate that the relationship could create cash flow challenges for your business.
Have an emergency fund. Cash flow challenges often arise out of unexpected business circumstances, such as fluctuations in sales due to seasonality, or the competitive environment. An emergency savings fund (also referred to as retained earnings) empowers you to proactively prepare for cash flow challenges. While you may not earn a significant amount of interest on money in your retained earnings account, it protects you from having to borrow funds (and whatever interest rate charges they include) in case of a cash flow emergency.
How much money you need to keep liquid depends on the cash flow shortage risk you face given your expenses, and the level of volatility or uncertainty in your sales cycles, but a general rule of thumb is to save enough money to cover at least thr....
Cash flow challenges may be a reality of owning a small business, but there are best practices you can use to ensure you remain as in control of them as possible. Try these simple tips to build a business model that’s proactively designed to protect against unexpected cash flow shortages so you’re not at their mercy when they occur.
Tim Roach is the co-founder of Lendr, a leading provider of merchant cash advances for small to medium-sized businesses. He holds a degree in Finance from Linfield College, and previously served in the United States Navy. Prior to joining Lendr, Roach founded Oak Street Trading, a proprietary trading firm, in 2002.