Although everyone has heard the word “cash flow” before, not everyone fully understands “cash flow management.” Poor cash flow management can keep a business running for years, but it can also spell the end for your organization. You may occasionally have to deal with short-term cash flow problems, but other times you should start to consider the long term. Do you really want your small business to be one of the 3% that fail out of the 97%?
Cash Flow Management Strategies for Small Business
Paying closer attention to cash flow in the first place is the first step to increasing it. With the help of cash flow analysis, you can keep tabs on how money enters and leaves your company while ensuring that you have enough on hand to cover all of your bases. Examine both your inflows—where you anticipate receiving money from sales—and your outflows—where you actually spend money on things like bills, wages, and other expenses.
It’s crucial to understand your condition both now and in the future as part of this review.
People often compare their current bank balance to their bills, but it is not cash flow management, according to Weil. “Knowing what you can count on to arrive is what cash flow management is.
You may be able to anticipate problems in advance by paying closer attention to your cash flow and attempting to predict future trends: If you anticipate having a cash shortage in the next weeks, you can start making preparations now. You could utilize accounting programs like Xero and QuickBooks for assistance. These apps keep tabs on your transactions in real time. Based on this data, some also provide predictions about your future monetary position.
Anticipate Future Needs
Prevent surprises. Nothing is more challenging or discouraging than looking for money while you’re in a tight spot. Start by maintaining precise, timely accounting records, which are crucial for comprehending your company’s financial situation. To determine the amount of available cash and forecast the expected outcomes for the next three to six months, use your historical monthly income and cash flow statements, balance sheet, and both. These pro forma statements can assist in forewarning you of any deficiencies, allowing you time to plan for them.
Some business owners establish a relationship with a bank for payroll and general company accounts in advance of a requirement and provide the bank executives with operating statements on a regular basis to foster trust. These efforts, however, are not always successful depending on the power of the bank official. Make it obvious to your banker that the purpose of the relationship is to have access to funding if necessary when you let them know that you want to eventually apply for a loan to increase your chances. Prior to requesting any company line of credit, it is always preferable to establish a long-lasting relationship with New Zealand banks.
Build Connections With Lenders
The chances of being able to borrow money or persuade investors to invest more in your business when you really need them are slim. Since their primary goal is to be paid back, bankers are least interested in lending to a company that is in dire straits. Build relationships with people in the financial sector before you require their assistance rather than after, and you might be able to obtain a commitment for future loans.
Instead of borrowing against their accounts receivable, some business owners choose to factor their receivables, or sell them to a third party. The third party, or “factor,” and the company will discuss the specific terms, such as the value ratio paid for each invoice, whether the sale is “recourse” or “non-recourse,” and any costs that may need to be paid to establish and uphold the relationship between the firm and factor. The factor looks first at the creditworthiness of the consumer who owes the money rather than the company that offers the AR, which is advantageous for a firm, especially if it is new or has damaged credit.
Keep Your Cash Working
You may find interest-earning accounts at most banks, so keep your cash amounts there. You can come upon a minimum balance requirement occasionally. Consider keeping the majority of your money in higher-paying accounts, though, and then transferring money to meet the minimum balance requirement in your interest-bearing trading account because interest rates on these accounts are frequently lower than those on savings accounts, certificates of deposit (CDs), or money market accounts (plus the total payments due that week or month). Avoid long-term certificates of deposit (term deposits), which tie you down for a set amount of time and may cost you interest if redeemed early. Either put money into penalty-free certificates or into the area of your account that you won’t likely need to access for the duration of the CD.
Create a distinct payroll account and decide on a bimonthly cycle. Bi-monthly payroll systems only need 24 pay cycles each year, whereas bi-weekly payroll systems need 26, therefore they save on the additional administrative costs of gathering, confirming, and tabulating payroll data. Finally, to keep your cash generating interest, transfer payroll payments as soon as payment is due.
Speed Up Customer Payments
The objective of a small business owner is to receive money for their services or goods prior to or soon after incurring the costs of creating or delivering them. Receiving payment upon delivery (COD) is the ideal result, but it’s not always feasible. The day you deliver your product, send your consumers an invoice with the note “payment is expected on invoice receipt.” Don’t propose that you can wait until the end of the month. Include a statement to the effect that late payments will incur interest and that legal action may be taken to recover unpaid amounts. Maintain an established procedure for monitoring your accounts receivable aging, a report that classifies accounts receivable based on how long bills have been unpaid.
Transferring an unpaid client invoice to a financing business, often known as the factor, is the process of factoring bills. Around 80% of the fee is paid to you in advance by the factor, who is then in charge of obtaining payment from the client. You would receive the remaining funds when the client has paid, less the factor’s fee.
Because they are taking on the debt, “this puts the factor’s risk of collection onto the factor,” according to Weil.
You not only receive the money faster, but there is also no risk of the client skipping a payment. This small business cash flow management technique doesn’t work well for low-margin transactions because the factor charge can be significant—possibly 5% or more of the invoice amount. You require a sufficient profit.
If it appears that you will experience a cash flow problem, think about what business expenses you might temporarily reduce. You can save money by making decisions like postponing office upgrades, canceling unnecessary trips, and leasing equipment rather than buying it outright until you figure out how to enhance cash flow once more.
It’s helpful to forecast your cash flow in advance because not all of these changes can be made over night. By doing this, you avoid only recognizing you have a problem when you run out of money for necessities and have more time and options for saving if you notice problems coming.
Use Loans to Get Through Dry Spells
A small company loan is another option if you’re in a short-term financial bind to help you enhance cash flow. You would receive funding up front to cover bills, wages, and other costs, which you could then repay once your company’s customer payments are caught up.
If you do borrow, be sure to have a plan in place for paying it back. It would be wise to wait if a significant sale was imminent and you simply needed to wait for it to arrive.
Another choice, outside outright loans, is to open a line of credit. As a result, you would have a predetermined borrowing cap that you could borrow up to, pay off, and then borrow again. Prior to borrowing from the credit line, you are not required to pay interest. Even if you don’t require money right away, it could be worthwhile to start one so that you are prepared in the event that you do.
Maximize Cash Inflows
There are other ways to enhance cash flow, particularly if you sell customized goods or sign long-term contracts. If the product or service is extremely large, complicated, or unique, you should demand security deposits that are equal to 50% of the total order. Set up payment schedules and quantities that match or surpass your sunk expenses if you operate with contracts. Ask for more money through fees or change orders if your consumer requests modifications to typical goods or services that aren’t mentioned in your contract.
Small businesses that offer a recurring service or good should think about subscription sales, in which customers make a prepayment. The upkeep of swimming pools, cable television, newspapers, magazines, and other services that lend themselves to a subscription model include gardening. You gain the benefits of ensuring future revenues and simpler resource scheduling in addition to obtaining upfront cash to cover future costs.
In addition to sales and payment options, layaway plans have once again become popular. Customers can choose a specific product through a layaway service, which will then hold it for later purchase and delivery once payment is made in full. This enables the seller to use the money before paying the expense of the good. Make sure your accountant is aware of the program as it requires special accounting handling of the cash received. Take into account accepting credit cards to guarantee fast and reliable payments. If you decide to do this, you should increase your rates to cover the additional expenses and provide cash-paying consumers a discount equal to the fee that would be charged for credit.
When managing your funds, it’s critical to remain focused. Knowing how much money is coming in and going out of your firm will assist you avoid stopping or running out of money, even if you are aiming to expand. Searching for chances that are likely to result in you earning more money is another wise move. Then you can use this money to finance the subsequent steps in the development of your company.