Cash Flow can make or break any business, be it a large, medium or small business. At times it can seem like ample cash is flowing into your business, but by the next quarter, that wellspring may have dried up. And during those lean weeks (or months), bills are still due and creditors and vendors are awaiting payment. For smaller businesses, there becomes the question of making payroll manageable, let alone your own pay.
Every business, large and small, can run into cash flow challenges. Cash flow problems are one of the leading risk factors that result in business failure. Fortunately there are ways to help weather the drought as well as prepare your business to better predict and manage your cash flow going forward.
Good cash flow management boils down to three things: Measurement and forecasting; improving management over payables and receivables; and lastly, preparing for shortfalls.
Know Your Businesses Highs and Lows.
Study your past financial records to pinpoint periods of negative cash flow (when outflow was greater than incoming cash), as well as periods of positive cash flow, identifying any events or trends that might have contributed to these positions. For instance, is your sales cycle seasonally driven? Is there a time of year when expenditures are higher than usual? Understanding the highs and lows of your business will help prepare you for lean cash flow periods.
Prepare Cash Flow and Sales Projections
Good cash flow management is more science than art - beyond broad analysis, a deeper dive is required to truly succeed here, as assumptions can lead to problems. The key to making accurate cash flow projections is collecting very detailed information about the amounts and dates of all upcoming cash outlays and inflows. There are an increasing number of tools and software available that provide statements and automated forecasts as well as cash flow management tools that can help streamline this process. Today, financial services technologies companies, such as Mentio.ca have predictive cash flow forecasting capabilities to help small businesses forecast their cash flow positions. These programs are extremely valuable in helping small business owners and their accountants gain insight into the near future.
Stagger Bill Payments
Many bills are due around the same time (e.g. the end of the month). If you pay your bills once a month, at the same time, your cash flow will always decrease significantly over a single period. And during a slow period, this could really put undue pressure on your business. Instead, try setting up your bills strategically spaced out throughout the month. Work with your suppliers to put in place arrangements that help manage this outflow.
If you have a regular billing cycle, it might be time to re-evaluate it. Invoice a client when the job is done, instead of waiting for your usual billing routine. Another approach is to either ask for a deposit or retainer before work on a project begins. This can help to pay upfront for the costs and labour associated with the project and lower your working capital requirements.
Offer Incentives for Quick Payment
Waiting on money owed can be a real cash flow drain. Offer a discount or reward for prompt payment, targeting customers that typically lag in payment. Leverage tools to track, identify and send automated reminders to these accounts. This not only can be effective in improving your receivables flow, it can also help build customer satisfaction and loyalty by rewarding your best customers.
Offer Multiple Methods of Payment
Being flexible in how your business receives payment provides added convenience for your customer – which is always a good thing. But the benefit to you as a small business is that by leveraging emerging financial technologies to improve your customer’s point-of-sale experience, you’re also enabling your customers to pay you faster.
Keep Cash Reserves
Despite your best efforts in preparing forecasts and projections, cash shortfalls are a possibility - especially if your business is light on cash to begin with. For this reason, it is essential that small businesses put some money aside when times are good. It seems intuitive, but the temptation to reinvest in growth can often undermine your efforts to maintain cash reserves. Your cash flow projections can help guide you on when to spend, and when to save.
Seek Out a Loan or Line of Credit
It is not uncommon for companies with or without sufficient cash reserves to struggle with cash flow requirements. Even the best cash flow projections have some assumptions that may be educated guesses - not a peek into the future - so when things take an unexpected turn, a line of credit or loan may be required. Applying for a loan at a traditional bank can be a lengthy, time-consuming process, often resulting in rejection, or receiving the funds too late. Fortunately several financial technology companies like Lendified.com offer same-day loan decisions through a 100% online application process – the value proposition being that you can spend more time on your business as opposed to preparing for lengthy credit adjudication processes.
With a good understanding of your future cash flow requirements and access to a credit line or an online small business loan, you’ll be much better equipped to meet the challenges of growing your small business.s,