Sometimes running a business is a straightforward affair. Without cold hard cash flowing freely through the veins of your business, you won’t be able to pay your bills or invest in growth.
The issue is that for many small business owners the difference between money owed and money received is not something they reckon on from the outset. And that can be a big problem.
Equally there are too many small business owners out there who are all to eager to pay their invoices of the day they come in. If you’re not willing to put yourself in robust control of your cash, you’ll put yourself in danger of carrying minimal cash reserves – and being unable to ride out difficult times. The good news is that better cash flow management, including taking a stronger position when dealing with suppliers, can improve cash flow and keep your business healthy.
Combining some key management techniques with efforts to attract and retain customers can provide businesses with a surplus of available cash for completing daily operations and investing in the future.
What is Cash Flow?
Simply put, cash flow is the amount of cash moving in and out of the business. More specifically, cash flow is the amount of cash the business has left over after bills and expenses are paid. A positive cash flow is a situation in which a business takes in more revenue than it gives out; a negative cash flow is a problem situation in which a business does not take in enough revenue to cover its expenses.
For more information about basic cash flow, look at this model.
Why It Matters
Poor cash flow can wreak havoc with a small business’ health. According to the Small Business Development Corporation, businesses can fail even if they are profitable due to problems with cash flow. If a business’ cash flow is not managed properly, the business may not have the ability to pay its bills on time, which can lead to poor credit and difficulties getting small business loans. It can also cause serious problems, such as eviction from the business premises due to non-payment of rent. In addition, a cash flow problem makes it difficult for businesses to purchase needed supplies or services to expand or effectively run the business.
Cash flow isn’t primarily a matter of ‘selling’ enough or having enough customers. If cash flow is poorly managed, the business will not have the flow it needs, even if it appears to be taking in a lot of money on paper. That’s why it’s important that every business owner learn to manage cash flow appropriately.
Key Steps to Improve Cash Flow
Businesses need to take several steps to correct errors in cash flow management. Strengthening your position when negotiating with suppliers is vital to managing your cash flow. If you don’t know how to negotiate with suppliers, you’ll end up wasting money and reducing your cash flow. These steps will help you improve your cash flow:
Make supplier research a priority. Know which supplies you absolutely need and which are optional so that you can cut costs and negotiate from a position of power. Research prices in order to motivate suppliers to bid against each other for the company’s business.
Ask for the longest terms possible
Don’t be afraid to ask for what you want–how else will you ever get what you need from suppliers? When negotiating, ask for the longest payment terms possible. Longer payment terms provide more of a buffer between your receivables and your payables; with more time between payment due dates, you have a better chance of receiving enough cash to meet your business’ needs.
As the business expands, it might outgrow the original agreements with suppliers. A bigger business means more power, so re-negotiate to get lower rates. Renegotiate contracts with suppliers annually, regardless of how the business is growing, to ensure you get the best deal.
Get customer collections under control
One of the largest sources of cashflow problems is customers who don’t pay on time. When the customer fails to pay, the business doesn’t take in any revenue, which throws off the financial plans. The easiest way to resolve these types of problems is to require up-front payment. For example if you run a wedding catering business, ask for upfront payments for wedding cakes or other special orders, then use that money to purchase the supplies needed to complete the order. That way, there’s no question that customers will pay, nor will the business ever be stuck with an order it can’t complete because of a cash crunch.
Consider expanding lines of credit
In a crunch, your business can use credit to help it hold on to more cash. By expanding a line of business credit, you can make payments for needed supplies and other costs of business without putting down cash until , the credit card bill is due, typically at the end of the month. This strategy can put more cash into the business on a daily basis. In addition, your business may earn cash back on its line of credit, which also positively impacts cash flow. Many small business suppliers extend lines of credit to their business customers; you can negotiate longer terms for repayment of credit used as discussed above.
Always perform financial forecasts
Cash flow management requires long-term thinking, advanced planning and research into both supplier practices and competitor practices. Financial forecasts are a crucial part of the cash flow management process. Businesses need to have an idea of upcoming expenses so that they can predict the type of cash flow needed and can plan to get enough cash into the business to cover expected expenses.
Create an emergency plan
Natural disasters, fires or theft can occur with little to no warning, and if your business isn’t prepared, you could need a lot of cash that you don’t have on hand. For example, after superstorm Sandy hit New Jersey and New York in October 2012, manufacturing plants had to close, creating a ripple effect where businesses couldn’t get the supplies they needed. In addition, many businesses themselves sustained extensive damage and equipment loss. During this time, businesses that didn’t have money set aside for emergencies were in a far worse position, finding themselves without nearly enough cash on hand or viable means of getting it to complete repairs or purchase new equipment. Even if your business isn’t in an area where hurricanes or other natural disasters happen very often, you never know when an equipment malfunction or workplace accident might throw a monkey wrench into your financial and operational plans. Businesses that have not put aside revenue for emergencies, acquired a line of credit or otherwise planned for emergencies may end up in financial trouble. Rather than panicking–which can lead to unwise practices such as borrowing from predatory lenders– consider contingencies that are likely to occur and create a plan for dealing with them.
Remember, the unexpected can always happen, of course, which is why emergency planning is an important part of cash flow management. However, accurate forecasting cuts down on the number of emergencies because it gives you a rough idea regarding how much cash you will need and when you will need it. This is especially important for seasonal businesses that may have slow periods. If a seasonal business doesn’t take in significant revenue during certain months, it must have a plan to bridge that revenue gap and pay for expenses.
Avoid predatory lenders
Failure to plan can lead to several negative consequences for businesses. For one thing, predatory lenders — lenders who charge absurdly high rates and who engage in illegal, abusive tactics to recollect debts from business owners who cannot repay them immediately — thrive on panicked business owners who feel they have no place to turn. Getting involved with a predatory lender can destroy your business’ credit or disrupt cash flow even more with high monthly repayment obligations.
In addition to predatory lenders, businesses that don’t think about cash flow until it’s too late may decide to lay off employees or reduce salaries to solve the crisis. This leads to poor morale within the company, more negative customer experiences and ultimately loss of customers. As a result of the revenue lost, businesses end up with the same poor cash flow and may have to cut even more employees. This vicious cycle can end with the business closing its doors for good.
The solution to this problem is to prevent it by thinking about cash flow strategy before a crisis develops. Rather than waiting until cash flow is severely restricted, monitor your cash flow as soon you open the doors to your business. That way, you’ll be ready, willing and able to navigate crises when they occur without having to resort to tactics that do the business more harm than good.