As a small business owner, you’ll hear a thousand times over that “cash flow is the lifeblood of your business.” Even if you’re sick of hearing it, it’s important for you recognize why the saying is so popular. Cash flow management will literally make or break your small business. According to Dun and Bradstreet, 90% of small businesses fail because of poor cash flow.
So, if you want your business to succeed, cash flow needs to be one of your top priorities. Watch for these 3 signs to tell if your cash flow is headed for trouble.
1. Short-Term Debt Overload
Many small businesses turn to short-term loans, which are 3-month to 18-month term loans, that you pay back with daily or weekly debits from your bank account. Others turn to merchant cash advances, where lenders purchase a portion of your future credit card sales. The lenders advances you a specific sum, and then you pay this sum (plus their fees), with a set percent of your daily credit card sales.
These shorter-term products are easier to qualify for than, say, SBA loans, so many small businesses turn to them to help build their businesses. Short-term debt is a great solution for short-term cash flow needs, but if you aren’t careful, these products can start eating into your cash flow, as you’re making daily payments or losing a portion of your sales every day.
The Remedy?
Try refinancing the short-term debt. There are some lenders out there that offer longer-term loan products that are willing to work with small businesses. You’ll have a lower cost of capital overall, as these longer-term loans have lower interest rates than shorter-term products.
2. Slow-Paying Customers
If you have slow-paying customers you will often feel a cash crunch. Without predictable cash flow, it is hard to plan for your own expenses, such as paying your own suppliers.
The Remedy?
Set expectations upfront. Before you even start a relationship with a customer, make sure to put your payment terms in writing, and have them sign it. Verbally talk them through and let them know how serious you are about your accounts receivable process. If the customer goes into the relationship understanding what’s expected of them, the chances of them living up to those expectations is much greater.
There are two things you can do in this situation.
Use invoicing tricks: A slight change to your invoices can increase your actual chances of getting paid. For example, did you know if you add a please and thank you to your invoice you might get paid faster. There is data out there that shows you could increase timely payments by 5%.
Don’t leave anything out: Make sure you invoices have everything the client needs to process the invoice, such as a PO number, your EIN and the right billing contact name. Often payments delay come from the wrong person receiving the invoice.
Remind your customers of your bill before the due date: If they are late, send them a reminder the very next day. Be aggressive. Try to open a conversation and see if you can identify why the payment is late. Either way, the diligent follow up will result in faster payment.
3. You’re Growing
Has your business experienced immense growth recently? This is obviously a good thing, but could mean bad things for your cash flow. Growth can be expensive, as you have to hire more people, find a bigger space, buy more supplies, etc. If you don’t have a heavy cash cushion, you could find your cash depleted before you know it.
The Remedy?
Prepare early. The absolute best thing you can do is to prepare for the rising costs before they hit you. Often the best way to do this is by getting a small business loan or line of credit. A loan or line of credit will make your cash cushion bigger, and allow you to have immediate access to financial resources as your costs start stacking up. Not to mention, the best time to apply for a loan is before you need one. Fast funding is always more expensive.
If any of these signs are hitting close to home, it’s best you start implementing the “remedies” as soon as possible. Very few things are as important to your business as cash flow management. Taking care of cash flow trouble early on keeps it from escalating out of control.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. She is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more. Follow her on Twitter: @Mere_Wood
Thank you for sharing some signs that show your cash flow is in trouble. Specifically, you start by talking about how many small businesses turn to short-term loans. I can see how these could be good for the company because they are easy to get and will help you get out of debt for a short amount of time. As you suggest, though, it’s important to make sure that you are budgeting and refinancing the short-term debt effectively so that you don’t encounter bad credit and large amounts of debt in the long term. This is definitely something really important to keep in mind, so I appreciate the insight!