Managing cash flow for small business owners is often the number one priority for their businesses. Whether it’s keeping it or simply sustaining a certain benchmark, cash flow issues can cause heart ache if they begin to decline.
This is the message from Francisco Castro who founded a financial planning and business analytics firm called AnalytIQ.
ezClocker reached out to several small business experts like Castro to learn the best strategies entrepreneurs should use to handle their cash flow issues. The tips they provided can be monumental for entrepreneurs who want to run their businesses’ finances like their larger counterparts.
Employing effective cash flow strategies can help you anticipate and prepare for future ups and downs in your profits and expenses. Understanding the basics can help small business owners not only compete better, but they can also help them grow their businesses at paces that won’t lead to financial stresses, or ruin.
Here are the top 5 tips to help you fix any cash flow problems in your business:
1. Put forecasting at the top of the list
The first thing you should do when it comes to addressing your business’s cash flow issues is to estimate how much money goes in and out of your business. Called forecasting, this strategy includes all your projected income and revenues. It excludes all your expenses and costs.
By being able to anticipate cash flow shortfalls, an owner will be able to implement a strategy quicker and more effectively than if they are reactive to the problem, says Castro.
Once the issue has been identified, it’s easier to identify whether the problem is coming from cash inflows or outflows. Castro says:
If you’re not sure how to do this, take your total expenses and income then break it down one step further in customers, payroll and vendors.
Repeat this exercise over the prior four months and it should be self-evident where your problem lies.
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2. Avoid short-term solutions
A nasty habit that business owners often develop is trying to sell more of their products and/or services when they develop cash flow problems. This strategy, which is usually anticipated to be done over the short term, can lead to the problems worsening over time, according to Castro.
The other options you’ll see will be short term loans, or factoring. Although these are viable options, they need to be looked at carefully since the high fees associated with them can create larger issues. Castro said.
FundThrough, a leading invoice finance company, provides alternative lending solutions, such as invoice financing. Outfits like FundThrough may advance your business the money from an outstanding invoice. This means the small/medium-sized business owner will have access to their funds almost immediately, so they can bridge the gap while they wait to get paid.
However, there are fees, as Castro points out.
If a business owner has the option to go into their bank and get a line of credit that comes with a lower interest rate, that should be one of the first options considered.
Castro also says: Finally, along with the above strategies, a review that needs to be taken seriously will be to conduct an analysis of the expenses being incurred and planned. If the company has reduced their expenses already then the final strategy that needs to be reviewed are the payroll options.
3. Avoid common missteps
Marco Castelán, co-founded a business consulting firm called The Navio Group. He also told us about the importance of paying and collecting what’s due on invoices.
He says that with small businesses, getting in the door is often the hardest part, and as a result, there is a temptation to enter into sales agreement to start work quickly.
However, by moving past critical conversation regarding payment terms, invoicing expectations and the overall accounts payable process, a business can often find themselves waiting an exceptionally long time for their first check, Castelán says.We often see that there are two main struggles in maintaining a stable, positive cash flow. The first is thinking long term in contract negotiations and the second is putting systems in place to ensure fund collection.
By dealing with the initial contract with “patience and a view towards how to make the agreement last years, rather than months,” Castelán says a business can help its future-self avoid trouble.
While one deal or one late check may not catch up to a business right away, it can snowball out of proportion very quickly.
If you have to pay your bills in 30 days but your customers get 90, that will negatively affect cash flow. Consider adjusting them.
Don’t be shy when it comes to pursuing past due clients. Money Crashers’ David Bakke says that if emails or text don’t work in getting them to respond, simply give them a call. You may be surprised at how people can be reluctant to have such personal communication with someone who owes them a debt.
4. Don’t fear technology; embrace it for cash flow purposes
Bakke also encourages small business owners to take advantage of technology. He notes that there are several software programs available that can help with cash flow, such as Cushion or Float.
Bakke suggests you offer your customers more payment options. These include PayPal, Venmo, Apple Pay, or Square.
FundThrough says: These days, accepting payment only by check will slow down the speed in which you are paid. By allowing clients to use direct deposit, PayPal etc., you will likely see payment faster.
Next, compare the payment terms that you’re required to follow from your suppliers to the ones you have set up for your clients.
A misstep Castelán sees relates to people failing to put a sound system in place to collect funds from customer. For most customers, paying bills is not necessarily at the top of their priority list, and as a result, it can sometimes fall off their radar, he warns.
By putting in software that flags overdue invoices, and creating the necessary human interventions to make good on the warnings, a business can keep its cash flow more consistent and predictable.
“Often it only takes a gentle reminder for a customer to click an approval box or send a note to their finance department but by ensuring your business stays on top of it, you help bring your invoice to the top of the pile.”
5. Dealing with cash flow gaps
Small business often find themselves with cash flow issues. The reasons vary, but the results can be the same. That being the loss of your business if you are not able to get your expenses under control so they don’t outstrip your profits.
FundThrough provided a bounty of tips for businesses who find themselves struggling to pay rent, make payroll or purchase new inventory as a result of cash flow gaps.
- Don’t be too hard on yourself. Thousands of small and medium-sized businesses encounter cash flow gaps. It’s a natural part of scaling a company and usually occurs when you are growing fast.
- In order to solve a problem, you must first get to the root of the problem. Find the source of your cash flow gap and begin problem solving there. For example, for many small and medium-sized businesses, cash flow gaps are the result of long payment terms. This means business owners may have to wait months before their outstanding invoices are paid. The money is on the way but can’t yet be accessed.
- Build a relationship with your customer. You do business with a person, not a company. Get to know your primary contact who signs off on and processes your invoices. By building a personal connection, you have someone to speak with directly should an issue arise.