Cash flow is the lifeblood of any enterprise. But what is it, exactly?
The most basic way to describe it is simply the cash flowing into and out of your business. When a cash flow is positive, meaning more is coming in than going out, your business is healthy. And if you’re experiencing more cash flowing out than in, you know there is a problem you need to address.
Knowing your company’s cash flow status and strategically managing it helps you recognize when changes are necessary and whether it makes sense for you to take advantage of a growth opportunity should it present itself.
So, here are a few tips for managing cash flow.
1. Know Your Cash Flow Status
When you first went into business, you might have worked a day, a week or a month ahead at a time. In other words, as long as you got through that day, week or month with a little cash in your pocket, you felt great. At this point in your business, though, being able to plan for many months and even years down the road is a must. After all, you don’t want to feel the desperation of looking for cash after things are out of hand.
Cash flow forecasting is the basis for a solid plan. It starts by collecting documents like your taxes for the last two years, your last several months of bank statements, and any income or balance sheets you have on hand. Also pull up any data available relating to invoicing, future work, etc.
Using this historical data, outstanding invoices, and anticipated future revenues you will gain a great snapshot of your current situation–and your likely situation three to six months from now.
2. Maximize Cash Inflows
Now that you know where you are today in terms of your cash flow, let’s talk about how to maximize that cash flow moving forward. For example, if you sell custom products or engage in extended contracts, you can increase cash flow by requesting a security deposit equal to 50% of the order. For many businesses, this applies to products or services that are unusually large, complex, and one of a kind.
Sometimes, a customer may demand modifications or services that aren’t in the contract (aka a change in scope). This may mean unexpected additional costs to you—and it’s reasonable to seek additional payment through change orders or fees.
Another option for small business owners providing regular services or products is to structure their business to an approach like a monthly retainer, having clients prepay for services. This strategy makes cash flow much more predictable. It also eases the difficulties associated with scheduling resources like extra help during a busy season.
3. Shrink Cash Outflows
Running a business is expensive. Consider some of the following strategies to help you tame cash outflows.
- Repairing capital equipment rather than replacing it—or purchasing used equipment that is in good shape rather than buying new
- Delaying product upgrades until they’re necessary
- Asking workers accept direct deposits to save you the time and cost of writing and mailing checks
- Cancel subscriptions to unnecessary apps or software (for instance, could Google Suite replace separate storage, email and file-sharing apps?)
These may seem like small reductions in expenses, but they can add up quickly in terms of your cash flow.
4. Build Connections with Lenders
Handling normal operating costs is part of running a business. From time-to-time, however, you may find yourself in need of a loan to cover unexpected expenses or for purchasing equipment. For that reason, part of a cash flow management plan should include establishing a great relationship with a quality bank or credit union. A strong relationship means that when you do need cash, they will already know that you and your business.
Keep in mind that secured loans can be tied to assets such as:
- Inventory, including raw materials and finish products
- Accounts receivables, which act as a revolving line of credit. Account receivables are a percentage of the total sum payable within a period of between 60 and 90 days.
5. Work with Your Vendors
Strict and/or short payment windows for vendors can hurt your cash flow. Unexpected costs will arise, and you will need some flexibility. Work on developing great relationships with vendors while remaining consistent with the terms of the sale.
6. Educate Your Customers
Naturally, you want and need lasting relationships with your clients, but it’s absolutely okay to educate customers on your payment policies—and to hold to them. Your product/service incurs costs to deliver, and delays in getting paid means you have to carry the negative cash flow balance, inherently putting your business a little more at risk.
Remember that it is common for businesses to charge interest or a late fee on delinquent payments. By adding that language to your invoices or contracts, you not only help to educate customers on your expectations, but also allow yourself the option of pursuing collection of any unpaid amounts.
It’s also a good idea to follow up with late or delinquent payers—and in fact, doing so can actually be a chance to foster a long-term relationship. Offer delinquent payers the chance to pay by credit card or enter into a payment plan, for example. Not only does it help you, but it could also help them manage their own cash flow concerns.
If you are consistent with how you handle this aspect of your client relationship, your best clients will quickly pick up on what is expected and help you make each transition timely and efficient.
To learn more or start managing your cash flow, download our free Cash Flow Forecast Template.