We’ve all heard the saying, “Cash is King.”
While the words may be cliché, they’re also true — particularly for the small business. Without a cushy safety net or direct line to a big bank’s lending department, survival often hinges on your ability to effectively manage the delicate balance of cash in and cash out.
When there’s no cash on hand, everything is tough. Paying salaries, paying bills, buying supplies, not to mention making the investments needed to grow to the next level. If you’re looking for tips on managing your business cash flow, below are seven to think about.
Tips for Managing Your Business Cash Flow
Get a Hold of Your Finances and Forecast
The key to managing your business cash flow is understanding how things stand now, and where they’re likely to go. Most businesses experience some kind of cyclical highs and lows; maybe your clients vacation in August, landscaping jobs drop off in the winter, your retail store peaks in December or leading up to a new school year.
Analyze your monthly sales over the past years to look for any trends, and put together a rolling 12-month forecast. You may want to enlist the help of a bookkeeper to offload these tasks. When you start mapping things out, you can better anticipate and plan for surges in expenses and times when sales are tight.
Separate Your Business and Personal Accounts
If you’re a sole proprietor or freelancer and have been pooling all your money matters in a single account, it’s time to separate your business and personal finances. It’s the only way you can get an accurate view of your business’ financial standing. Keep in mind that if your business is structured as a corporation or LLC, you’re legally required to keep separate accounts.
Pay Your Bills on Time (But Not Early)
You might think you’re the epitome of responsibility by paying your bills the minute they come in. However, it’s recommended to wait until your bill is due before paying. This way, you have cash on hand should an unexpected expense arise. Set up electronic bill pay to make the scheduling easier.
Get Disciplined About Your Invoicing
Yes, there will always be ‘trouble’ clients who are notoriously slow to pay month after month. But more often, when managing your business cash flow, the biggest culprit in slow payments is your own slow invoicing. Many small business owners don’t treat their invoicing and administrative tasks as a priority compared to their client work and day-to-day activities. But the bottom line is if you don’t invoice, you don’t get paid.
Create a formal structure to make sure you invoice as soon as a project is complete or deliverable sent. Set aside time each week (could be 15 minutes every Friday morning) to review your invoices, make sure nothing has slipped through the cracks, and follow up on any past-due invoices.
Offer Discounts for Early Payers
Some businesses offer a small discount to those customers who pay their bills early — this can be a particularly effective strategy for encouraging those late-paying clients to start paying early. You can also check if some of your own vendors offer an early-bird discount.
Consider Long Term Lending, Even Leasing
Generally speaking, leasing or taking out a loan to purchase a piece of equipment or other item will cost more than buying it outright. However, longer term financing, even leasing, can be advantageous since it frees up your cash for other expenses. Vendors will typically offer attractive deals and low interest rates for larger purchases like vehicles, computer equipment, or tools. It’s much harder to get a loan with a similarly low interest rate to cover your day-to-day expenses or payroll.
Communicate ‘Cash Flow’ to Your Employees
If you have employees, make sure they appreciate the importance of cash flow to the health of the business. For example, sales staff should focus not just on making the sale, but also ensuring that invoices are paid on time and in full. Project team members should understand the importance of closing out a project in a timely manner in order to send out the final invoice and close the books.
Keep in mind that all businesses, no matter their size, struggle with managing business cash flow at some point. You can’t avoid challenges altogether, but you can take some proactive steps to better manage your finances and anticipate shortfalls.
What are some ways that you are managing your business cash flow?
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