Cash flow management is one of the primary drivers of the success or failure of a small business. According to a US banking study, 82% of the businesses fail due to poor cash management. That’s a startling statistic, and it shows just how important cash flow management really is.
Cash-flow issues are one of the greatest challenges of business ownership. Unfortunately, for many startups and small businesses, cash flow management isn’t a top priority, until it becomes an issue. And usually, by then it’s too late. Often, it’s because, to focus on their core competency and on all of the things that make their business stand out against its competition, many business owners lose sight of something fundamental and generic like cash flows. But it’s practically the lifeblood of a business, and if you can’t control or direct it, your business cannot flourish.
Importance of Cash Flow Management and Strategies
You don’t need divinity cards, black Buddha, astrology and candles to predict cash flow.
Cash flow is simply the money flowing in and out of your business. How cash flow impacts a business varies from one type of business to another. It’s easier to understand that a lot of cash flowing into a business and a lot less of it flowing out in taxes, salaries, expenses is a good thing, and it’s the golden rule of profitability. But cash flow management is not that basic or straightforward.
It’s not just about how much cash is coming in the business; it’s also when and how. A business where one month, a lot of receivables are getting cleared, and then there is no cash flowing in the business for another month, will mostly manage cash differently than a business that handles expenses and income on a daily basis.
Whatever your business’s situation and model is, it cannot function and flourish without proper cash flow management. There are several strategies and tips, and they vary widely for business to business. Still, one good rule of thumb that many small organizations and companies follow is to try and keep enough cash on hand to cover three to six months of operating expenses. That might seem like a hefty amount, but its importance is evident in the current pandemic driven market. Many small businesses are doomed to failure because they didn’t have enough cash on hand to stand through a few months of low to no operating income.
There are several strategies that you can employ for better cash flow management of your business. Very simply put, you have to work from two different angles. You have to increase the money coming in, and decrease the money that’s going out of the business, at least on wasteful or manageable expenses. So let that be the first strategy.
The cost of doing business doesn’t seem too heavy when you are running a thriving enterprise. Most business owners tend to get generous and even careless about costs during good times. Consequently, when sales/business drops, the same costs seem hefty and unjustified, so they begin taking hasty cost-cutting initiatives that either alienate their employees or drive away clients/customers.
The ideal situation is that you focus on keeping your costs at a minimum from day one. That doesn’t mean that you should have to stay your hand from essential expenses. Some of the things that small businesses can do to mitigate costs are to leverage technology as much as they can, like, instead of opting for a physical landline to establish credibility, they can look for virtual phone service. It’s usually cheaper and easier to manage.
Other initiatives include going paperless, buying used or refurbished equipment, or lease if it makes more financial sense. Many small businesses can come to mutual barter arrangements when exchanging services. Bartering allows one party to save cash and cut costs and the other party to get a favorable deal.
Track Your Cash Flow
Effective bookkeeping is one way you can monitor your cash flow quickly. Profit First is a simple strategy that makes managing cash flow quick and easy. Greg Crabtree, author of Simple Numbers, Straight Talk, Big Profits, says, “Entrepreneurs commonly confuse cash flow with profitability. Profit First makes the process so radically simple that you no longer have an excuse not to be profitable AND have cash flow!”
If you are doing it yourself, you might find it challenging to keep your finger on the “financial” pulse of your business. By using a Profit First Certified bookkeeper, you’ll receive insights and a plan specific to your cash flow activities. In any case, you have to control your cash flow.
Cash flow management will not only tell you about profitability (or losses) of your business, but it will also help you with forecasting. This decision-making tool is a crucial part of cash flow management. By estimating the cash you’ll need in the future to support growth, you can adopt good cash flow practices. An example is allocating cash for daily, monthly, and long-term expenses (yearly taxes) or starting an expansion project using a cash pile instead of outside financing.
Cash flow tracking can be a breeze if you use the right systems, commit to using the strategy, and keep your books up to date. You can also learn to derive actionable insights from your cash flow data and implement them for better cash flow management.
Efficiency is all about getting the best out of available resources. If the bulk of your employees can work efficiently from home, you can keep a small office and minimal on-site staff. You can transform a cash-heavy workplace into a cost-effective workforce by investing in cost-friendly collaboration and communication tools. It will save your employees time, commute expenses, and allow them to work from the comfort of their home. For you, it will mean minimal running costs, low utility bills, and very few site maintenance costs. It’s just one example, and it might not be feasible for every business (a restaurant, for example).
Other efficient initiatives may include investing early on in tools/items like a smart thermostat, double-pane windows, tight seals, or solar water heaters to save costs in the long run. If you have enough budget, and you don’t see any problems in the near future, paying for yearly plans for software/app subscriptions that your business might be using, will help you cut down the costs substantially. With some modifications, you can turn your small working space more accommodating for a decent number of employees without the place feeling more cramped. It will prevent you from moving out to a larger, more costly space. You can also get rid of old assets that you no longer use. It will add something to your cash pile and declutter your inventory (and lighten up your books).
Receive Payments Faster for Better Cash Flow
Ideally, you want to be paid right after you have offered your services or delivered the finished product. But we don’t live in an ideal world, and invoices often get delayed. To remedy that, you can offer incentives to vendors who are willing to pay you the full amount before the typical 30-day period, like a 2, 3% discount. For some businesses, it’s appropriate to ask for a deposit or arrange for a milestone-based payment. A milestone payment system is a client pays you 25% upfront, 35% after the first draft is submitted, and 40% at project completion That will ensure that at least some of the money is coming in, even if the delivery and payment of the actual product/service take a lot of time.
Borrow Money Before You Urgently Need It
Before you need an emergency cash infusion, shop around for a continuous line of credit or a small business loan to cover part of your operating expenses (for a set duration) or to cover any specific costs. Since you won’t be desperate, you won’t give away too much negotiation power to the lender, and they may offer more favorable terms to you when there isn’t an “expensive” sword hanging over your head.
When your business isn’t indebted and has regular cash flows, your chances of getting approved for a loan are significantly higher. Businesses where profits and cash flows are impacted seasonally find this strategy is especially valuable.
Know Your Financing Options
You should know what financing options are available to you, and which will be the best fit for your business when facing a cash flow crunch. You can either borrow against a personal credit score, which is typically an option for sole-proprietors, but not a very good one. It’s also an option to surrender some control and bring investors/partners into the business. It might not seem ideal, but it’s usually more cost-effective than other options (like business loans), and significantly better than letting your business go under merely because it didn’t have a cash in-flow.
Asset-based financing and selling or borrowing against assets is also an option to get out of a cash-flow pinch. But it can result in decreased cash-flows in the future. However, it’s usually a smart idea if you are borrowing time to consolidate your other assets or look into better financing options.
Cash flow management can help your business stay afloat and grow. If you feel that numbers aren’t your thing, you should consider outside counsel or hire someone to develop and implement a better cash flow strategy like Profit First customized for your business. If you want to stay in business and have it support you, managing your cash is not something you can ignore.