New business owners tend to have a lot of enthusiasm and optimism about their business. They are busy greeting new customers, filing away invoices, placing orders, and managing employees. The finances are showing a profit, and everything looks great. However, it can be very easy to let your guard down and miss one of the most threatening situations in business operations. Poor cash flow. If you don’t keep your operations, finances, and investing activities running smoothly and efficiently, you are in for serious money troubles.
Understanding Cash Flow
There are several areas to your company’s financials, and you need to be aware of what each item represents to know if your operations and financial management are on track. Turning a profit isn’t the same thing as your cash flow. Profits are the monies you receive above the overhead costs associated with the production, sales, delivery, etc. Your cash flow is the amount of money you have in the bank at the start of the month and the money going out each month. In other words, its the flow of cash in and out of your business at any given time. If you are taking care of your payables before you have your receivables, you can get into a cash flow problem. The books say that you have made the money to pay for your debts, but the invoices on those sales are outstanding and may not be paid before the bills are due. A cash crunch can affect things like payroll obligation, paying your health or business insurance premiums, covering your vendor accounts, or utilities.
Keeping a Reserve
There are several strategies you can implement to improve your cash flow, but you should always be prepared with an emergency fund. Whether you have gone to a traditional lender for a cash influx or you pitched your business idea and practices to a venture capitalist like Mark Stevens, it is sound business practices to keep at least three to six months operating costs in the bank for emergencies. However, you don’t want to dip into this if you have long-term cash flow problems. This is where the following strategies come into play.
1. Improve Billing Practices
If your customers consistently pay past the thirty-day mark, think about offering a small discount if they are able to pay their bills before the due date. Not only does this create an incentive that energizes your customers and creates loyalty, but you also get your cash back in the bank. This is an easy way to boost your cash flow. Always send out invoices as soon as the purchase is made. This encourages more timely payments.
2. Lease Equipment
While many people feel that that leasing equipment is a more expensive option when it comes to the bottom line of your finances, the short-term benefits of saving your cash flow can be pretty convincing for leasing. Not only do you have to pay less upfront for the equipment or supplies, but you may also save on things like repair or upgrades since many vendors include those costs in the lease agreement. You are also able to count lease payments as a business expense, which can help you out around tax time.
3. Form a Co-op
If you know several other small business owners, consider banding together to form a buyer’s coop. When you pool your money and buy things in bulk, suppliers are more willing to haggle or negotiate better rates.
4. Check Your Customers
Even though you are desperate to make a sale, don’t sign on the dotted line if a customer is unable to pay in cash and you haven’t done a credit check. When a customer has poor credit, you assume a serious risk in letting go of your inventory. Your cash flow will take a hit if the customer defaults on the payments, but you also spend additional funds trying to collect on the past due amount. You can offset some of the costs by assessing a higher interest rate for customers with questionable credit.
5. Assess the Inventory
Your warehouse might be well-stocked, but if your products aren’t moving out the door, you have money sitting around on shelves. You would be better off to have a discount sale and see some return on the investment you made than to not make any money. You need to be objective with your inventory and let go of what is holding you back.
6. Pay Online
Rather than having to mail in your checks and waiting for them to clear, take advantage of online bill payment systems or automated billing centers. Pay the bills on the due date electronically, as you are giving yourself extra time waiting for cash to come in. You can also check on the grace period of credit cards, helping boost the cash flow if you hold out on your payment for an extra week.
Without strong cash flow, your business can’t survive. It doesn’t matter how profitable you might seem to be. Track your finances each week to stay on top of the data.