Many successful entrepreneurs will argue that proper cash flow management is the most important skill a small business owner can master.
In fact, a recently published survey shows that 64% of small business owners are burdened with cash flow issues, and that insufficient capital is a leading cause of business failures in Canada.
The following are a few well-worn tips on how to improve your cash flow situation.
How to forecast and improve your small business’s cash flow
Cash flow is the money -- or cash equivalent -- that’s coming in and going out of your business. If you’re taking in more money than you’re spending, then you have a positive cash flow.
If more money is going out than coming in, you have a negative cash flow and need to review your cash management practices:
1. Don’t mistake profit for cash flow
The best cash flow management practices are more complicated than simply reviewing your P&L (profit and loss) statement. Just because your business is profitable doesn’t mean you have a healthy cash flow. Several factors other need to be considered, among them your accounts receivables, capital expenditures, and debt servicing situation.
Outside of potentially defaulting or not being able to pay their bills on time, cash-poor businesses are typically unable to make the important investments they need to remain competitive, or find they have to pay more to borrow money simply to remain in operation.
2. Create a cash flow business plan
Your business may look good on paper, but your profitability is bound to suffer if you need a large outlay of cash and are unable to collect important accounts receivables within a designated timeframe.
It’s crucial that you monitor your incoming revenue and outgoing expenditures at least once a month, although doing so weekly, or even every second day, is optimal. Once everything has been compiled into one central document, you’ll have a clearer picture of your overall cash flow situation.
For this purpose, you’ll need to acquire some good accounting software that will allow you to address any gaps between your outgoing and incoming cash flow.
3. Review your inventory
If you have excess inventory that’s tying up a lot of money, look into selling it to help improve your liquidity. You might even consider unloading it at a discount to both get it out of your way and generate available cash. Getting rid of slow-moving stock could save you on storage costs as well.
4. Lease equipment instead of buying it outright
Another way to strengthen your cash flow is to lease equipment rather than purchase it. This will have a much lesser impact on your available liquid resources than buying costly equipment outright.
Leasing also offers several other advantages over buying, such as potential tax savings and a better access to the latest technologies.
5. Pay your own bills as late as possible
The longer you wait to pay your bills, the longer that cash will be accessible and earning interest for you. This isn’t saying to pay them past their due date, which will likely incur late fees and only hurt your business in the end, but to wait until the very last moment before paying them. Online banking enables you to easily set up payment for recurring expenses on the final day they come due.
6. Secure a loan
Sometimes short-term cash flow problems necessitate securing a loan from an alternative lender, which are typically far more flexible with their terms than traditional banks.
To address cash flow issues some of the most traditional financial products include revolving credit lines and equity loans. Another potential option is to secure a long-term amortized loan that includes interest and principal until the loan is paid off.
7. Accounts receivable factoring
Accounts receivable factoring is perhaps the easiest, most efficient way to make up for a temporary cash flow shortage. Factoring involves selling your invoices at a small discount to a financing company who pays you the majority of your outstanding invoices immediately and then collects from your customers directly. To know more about our accounts receivable financing go to our section about it.
8. Always have a backup plan
At some point most small businesses will find themselves in a situation where they need emergency cash. It’s wise to prepare for such an eventuality by keeping on top of your business’s credit score.
Should the time come, you’ll be able to widen your list of potential creditors and secure the best terms on the financing solutions available to you. One way to do this is to use a business credit card that will improve your credit standing while offering a source of emergency funding should you find you need it.
9. Have a good relationship with your accountant
Having an expert accountant is critical in order to find solutions when you need more cash flow. A monthly analysis of the cash flow could help identify the problems before they occur and help prevent them. One of the main error companies make is to avoid consulting their accountant as they think it will save them money. Successful entrepreneurs will tell you that it’s actually the other way around, staying close to your accountant and fiscalist on a regular basis will help the company prosper on le the long term.