How Small Businesses Can Avoid Cash Flow Problems
Cash flow is essential to the management of any business, but it is especially important for small businesses, which tend to operate on tighter budgets. Cash flow measures how much money is coming in versus how much is going out. Having a positive cash flow means that your business can cover expenses, manage debt and invest for future growth.
Keeping a keen eye on cash flow allows the business to track the cash that is there today and the availability for future funds to meet unexpected expenses. This is a difficult balancing act for small-business owners to straddle. Bank of America’s Eric Calaman put it this way: “Business owners are often, by necessity, very focused on what’s happening here and now, but they also need to plan ahead.” He goes on to say that owners need to forecast earnings and expenses for three to six months out.
Start on the right foot
Here is some sound advice for ensuring your small business is on pace to stay in the black:
- Customers who are not prompt with payments are a common challenge to cash flow. There are steps you can take to ensure this does not happen. From the outset, set very clear payment expectations with the customer. You may even ask for a deposit to start the process. It may also be helpful to form a personal relationship with the person who cuts the checks so that you can contact them directly with any payment issues.
- On your end, make sure to invoice the customer as soon as the work is completed and not wait until a month later for payment. Some companies even offer a discount to those customers that pay faster. Similarly, businesses may impose penalties on customers for late payment. It is also common to set up an online payment system that automatically processes the invoice as scheduled.
- Offer the customer a variety of payment options. If you are only accepting checks, this limits their options. Accepting credit cards or other forms of digital payment allows customers to pay faster, which has a positive effect on your cash flow. Look into using an invoicing tool. There are several budget-friendly online tools that make it easier to generate invoices, track and chase payments, issue automatic reminders and integrate with your bookkeeping systems. The investment is well worth it in terms of getting payment to you faster.
- Have a cash reserve to cover at least three months of expenses. Having this financial safety net protects you from cash flow issues in the present while allowing you time to identify what caused the problem in the first place.
- Analyze your own accounts payable process. Make sure you are choosing vendors that are flexible with payment terms. Prioritize invoices by due date rather than paying each one immediately. As far as credit cards are concerned, pay the ones with the highest interest rates first and then work your way down. Consider less costly forms of credit, such as a low-interest bank loan, especially if you need to carry a balance. If you do experience a shortfall, your bank will likely offer some solutions.
The challenges of maintaining positive cash flow are inherent in any business. The small-business owner needs to keep a positive attitude and continue offering the customer the best possible service/product. After all, the customer is at the heart of any business.
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