If there’s one thing that can sink your small business quickly, it’s cash flow problems. Your business needs to maintain a steady cash flow in order to buy supplies and inventory, pay yours and your employees’ salaries, meet expenses, pay rent, and invest in infrastructure and equipment. If you can’t maintain a steady influx of fresh cash, your business won’t last long at all.
But thankfully, there’s a lot you can do as a small business owner to mitigate cash flow problems. Successful business owners implement a combination of cash-flow-management strategies, including but not limited to slashing expenses, encouraging prompt payment of invoices, maintaining relationships with business lenders, and making available cash work for the business. Let’s take a look at some of the things you can do to make sure your business isn’t undone by cash flow woes.
Minimize Your Expenses
When you use the cash you have as sparingly as possible, you’ll be able to fund your business’s day-to-day operations while minimizing your reliance on loans or lines of credit, and that’s a good thing, because it’ll save you money in interest in the long run. Start by steering clear of financial surprises; anticipate your business’s future cash needs. Keep thorough and up-to-date accounting records. Use your past monthly income, cash flow statements, and balance sheets to keep a running tab of your cash flow needs for the next three to six months.
That way, you’ll be able to anticipate, and plan for, shortfalls before they occur. Advance planning can help you juggle your budget to make room for an anticipated need. If you decide you need to borrow money to cover your projected shortfall, it’ll be easier to get a loan before the situation becomes dire. Lenders, especially traditional banks, don’t like to give money to business owners who are desperate, because it’s a bigger risk.
Build Relationships With Lenders Before You Need to Borrow
Many business owners get in front of cash flow problems by establishing relationships with banks and lenders before they need to borrow money, and often, before they even expect that they might need to borrow money someday. If you already have a relationship with a bank for payroll, test the waters by telling your banker that you’ll want to take out a loan eventually, and want to know more about your potential access to financing in the future.
These days, however, traditional bank loans aren’t your only option for borrowing money as a business owner. You can open a line of credit for business with a non-traditional lender, open a business credit card, or look into other non-traditional funding options, such as invoice factoring, loans against equipment, or loans against your unsold inventory. Whatever option you choose, get the financing, or the potential for financing, lined up before the need arises, so that you won’t be left scrambling for funds at the last minute.
Collect Payments Promptly
Don’t let late-paying or non-paying customers become a burden on your business. Encourage a steady influx of cash from regular, prompt customer payments. You can do this in a number of ways, including:
- Collecting deposits or down payments on large orders;
- Offering an early-payment discount;
- Requiring payment when services are rendered;
- Penalizing late payment with an additional fee;
- Sending payment reminders regularly;
- Communicating clearly about payment terms and scheduling;
- Sticking to a regular invoicing schedule; and
- Accepting multiple forms of payment.
Keep track of outstanding invoices, and be persistent when collecting payments. Don’t be afraid to ask for payment or to withhold products or services until payment is made in full. To mitigate cash flow problems, try to collect payment as soon as possible after invoicing; most clients will wait until the last minute to pay, so avoid net-30 or net-60 terms in favor of shorter payment terms.
Make the Cash You Have Work for You
Make the most of the cash you have by putting it to work for you in interest-bearing accounts. Most banks offer interest-bearing checking accounts for business owners. These are a good option because they can help you bring a little more money in, while giving you full access to your funds. You may want to spread your money across multiple types of interest-bearing accounts, keeping some in a savings or money market account that earns higher interest and transferring it into an interest-bearing checking account as needed.
Your small business needs a steady supply of cash to thrive. Maintain that supply through diligent management of your cash inflows and outflows, and by nurturing a relationship with a lender who can help you get through the inevitable lean periods.