01 Dec Cash Flow
9 Vital Tips for Improving Cash Flow in Small Business
As a small business owner, no doubt you’ve spent a night or two worrying about how to improve cash flow in small business. If you’ve been in business for two or three years, it’s likely you already know there are times you’re more secure financially, and times you don’t feel so secure about the stability and future of your business. If you’re new to the small business world, you want to know all you can about cash flow and how you can manage it early on. Cash is “King” as the old saying goes, and it’s true. Below we’ve included a straightforward, easy-to-understand guide to help ensure your business isn’t one of the thousands that go under every year.
How to improve cash flow in small business
From what you owe for goods or services (accounts payable) to what is owed to you for goods or services provided (accounts receivable), there are many variables that can affect your cash flow including inventory, fixed costs, employee compensation, even how you buy your inventory or when you do your invoicing.
- First, let’s talk about your billing or receivables. How often do you invoice, and what methods of payment do you accept? For small business owners, accepting payment via cash, check, credit/debit card, or EFT’s/ACH’s, offering a wide array of payment options is essential. The more options you offer, the more business you will attract. Regardless of the method, it all ends up in your bank account as cash!Lots of small businesses prefer to invoice once per week, for example on Friday afternoons. Consider this for a moment; if you have customers who pay only once every 30 days (or even every two weeks for that matter), you’re missing out on cash you could have had in your account days earlier by invoicing immediately. Hard to break old habits or a routine, we know; but it’s important to having money flowing continuously into your bank account. If possible, invoice the same day and clearly state your terms on the invoice, or offer an incentive to pay quickly (10% off in paid within 7 or 10 days, etc.).When customer invoices are past due, give them a call. Don’t feel guilty, and don’t put it off – your business depends on it. How to improve cash flow in small business? Collect what’s owed to you!
- Pay yourself first. It’s hard to make sure you get paid when you’re stressing about paying employees, the electricity bill, rent, for inventory, and all of the other overhead costs. Many small business owners put off paying themselves to the very end, but think about the fact that you are the one who started the business and took the risk. While you may not feel you’re the one working the hardest, you ARE the one responsible for keeping things afloat, management, and who took the risk in the first place.
- Don’t be narrow-minded when it comes to accounts payable. When you’re worrying about how to improve cash flow in small business, one of the most important factors to keeping your business “in the black” is stretching out your payables. Vendors may require that you pay in 15 or 30 days, 45 days, etc. If you’re a good client, vendors may consider extending your due date for a couple of weeks. Even if you’re detail oriented and want to pay your bills on time, consider stretching it out as long as possible. If a supplier normally requires payment in 30 days but agrees to let you pay in 45 days, you have an extra 15 days to pay, interest free! This allows you an extra two weeks to collect payments from customers to go toward supplier payments and other expenses.
- Next, consider getting credit now, instead of later when you may be strapped for cash. Before you ever open up for business, secure credit. Perhaps you have family or friends who could provide funding, or some other form of cash reserves. The fact is, you need to secure credit early on in the event of a financial crisis, which can (and often does) occur with any small business. Those in industries similar to yours can help provide guidance, but be sure you have a source of cash in the event you do find yourself in a jam. If you wait until you can’t pay the bills, it will be difficult if not impossible to find anyone who will lend money to you. Ultimately, securing financing before you need it can help boost morale of employees (no late payroll) and help you avoid passing on a new (and profitable) client.
- Don’t be afraid to turn down business if it puts yours at risk. That “big contract” may sound so appealing, but if the client’s payment terms are 90 days and they won’t budge, it may not be such a good deal. Carefully consider all of your finances to determine whether you can really carry your business while receiving payment only every three months, or whether it may be your downfall. While every small business owner loves nothing better than a sale, not every risk is worth taking. Before you decide you won’t take on that new client whose payment terms are far out into the future, consider whether it may be possible to entice them to pay earlier. For example, it may be possible to get a large supplier to pay sooner by offering a discount.
- Make paying you as simple as possible. Anyone who has wondered how to improve cash flow in small business has eventually learned that making payment simple for clients is critical. Today our is a technology-driven world. Not only should you accept cash and checks, but payments via Paypal, credit/debit cards, or other options. Many businesses use online payment solutions today, including online processing services such as Braintree, Stripe, Bitcoin, etc. Accepting only cash or checks is old school, and will likely cost you valuable business.
- Avoid unnecessary costs during startup. The old adage “It takes money to make money” is true, to some extent. However, when you’re concerned about how to improve cash flow in small business, it’s important to realize that some expenses aren’t necessary, and that basically all you’re doing is taking away from profits. Splurging on the newest equipment, electronics, or marketing products may impress clients or even your competition, but you don’t need all of the latest gear. Do you really need to attend all those seminars and conferences? Do you look at spending as a way to avoid taxes? These are a few examples of spending mistakes small businesses often make during startup, according to QuickBooks.
- Cut overhead costs. You may think you’re already down to the bare essentials – but are you, really? For instance, you may want to consider hiring a freelancer for non-essential roles, as the cost will be lower overall. Considering all the expenses associated with employees (benefits, office space, equipment, your contribution to Medicare and Social Security taxes, workers’ compensation insurance, etc.), your staff can actually cost you up to 30% more than what you’re paying in wages! Some employees ARE essential, but consider your options carefully. Additionally, you may want to consider whether a smaller space would work. Would the landlord lower your rent if you were to offer long-term stability, for example stay in the building/office for 18 or 24 months? Depending on your situation, you may want to carefully consider purchasing a building with room for tenants, as leasing the additional office space is a great way to supplement your income. This is something you shouldn’t jump into, however; give it careful thought.
- Managing inventory. While you don’t want to have excess inventory, you want to make sure you don’t run out of a product that sells well either. It’s important not to overbuy, or think you have to have every size/color of every item right away. For most who ask how to improve cash flow in small business, the answer is in the inventory! Pareto’s Rule (the 80/20 rule) holds that in most cases, 80% of a company’s sales come from that 20% of the inventory that’s “hot,” or the biggest selling category. Many small business owners make the mistake (and often don’t even realize it) of adding items and categories over time in a way that’s gradual and almost imperceptible – until you look on the balance sheet. Try to avoid expanding your products/categories out of fear you won’t have something a customer is looking for. Slow-moving or dead inventory will drain your business of cash faster than any other one factor.
Starting a small business is both exciting and frightening. With the biggest concern being how to improve cash flow in small business, it’s vital to understand all of the various components of your business and how each could impact your bottom line. By following the suggestions above, your odds of succeeding will increase substantially!