If only it were that simple...
Cash flow keeps your doors open and the bills paid. It compensates your employees and vendors, lets you upgrade your equipment, and supplies the merchandise with which you stock your shelves. When cash flow slows to a trickle, you immediately feel the burn. In my business, I focus on managing cash flow effectively so I can keep my stress level down and focus on what I do best attract customers and build my brand. Here are some of the best ways to manage cash flow in a small business
Watch For Signs of a Cash Crisis
Think of your cash flow management system as the veins and arteries that deliver blood to different parts of your body. If your blood gets misdirected or suddenly halts, you’re in serious trouble. The same is true for cash flow in your business. Even if your customers continue to pump money into your business, unless they do it in a timely manner it often can feel like a blockage to your heart.
One of the biggest signs of a pending cash crisis is if you’re consistently spending more money than you bring in. Or if you’re spending down your operating capital to exactly when the next check is coming. If you never have cash reserves, something needs to change. Perhaps you need a better accounting system, fewer employees, better document management, more consistent payment terms. Try to negotiate monthly retainer agreements, or transfer as many customers as you can to electronic funds payments, which will help you get paid faster. Waiting for a check will definitely slow down your money flow.
Establish Collection Procedures
Don’t assume that an invoice automatically translates into a signed check. It doesn’t. If your customers or clients accept goods or services on a net-30 or net-60 basis, you must have collection policies in place.
First, send your bills out as soon as possible. If you hear nothing for 30 days, on day 31 send a reminder notice or make phone calls to collect the cash you’re owed. If you have on-going problems in this area, consider working with a collection agency.
Of course, your collection procedures won’t work if your customers don’t know what to expect. Before you finalize a contract, put in writing the details of your payment policies. Let your customers know when installment and final payments are due as well as the consequences for missing a deadline. Most importantly, include those policies in your contract.
Revise Your Budget
I probably don’t have to tell you that your business needs a budget, but when was the last time you looked at it? As circumstances change, you must revise your budget to align with current receivables, payables, and expenses. Evaluate your budget line-by-line quarterly. Make any adjustments that will improve cash flow management so you don’t find yourself in fiscal trouble and stressed out.
You might also need a line of credit, to manage ongoing cash issues in your business. You must be in business at least two years, with positive cash flow, to apply for a credit line from a traditional bank. Keep in mind that you can only borrow 10% of your gross revenue. If you wait to apply until you’re underwater, most banks will politely usher you out the door. Get a line of credit in place while you’re financially healthy. Be careful with a line of credit though. It really should only be used for short term cash issues. And when the cash comes in to pay down the line. Do not make the mistake of drawing down your line and treating it like a loan you can invest in your business.
I’ve seen businesses flourish despite low revenue, especially in the beginning, but I’ve also met entrepreneurs who have declared bankruptcy despite tremendous revenue. Getting on top of cash flow management early and managing your business with a budget offers the solution to this problem. For more small business advice, sign up for my weekly newsletter. I’m always offering unique tips and tricks that entrepreneurs can put to work for themselves immediately.