Did you know that research shows that only about half of small businesses make it past five years? Don’t want to be a part of those grim statistics? You need to get your daily operations on point!
Managing your business cash flow is one of the most critical elements of your company’s success. Without it, you’ll face serious problems- both in the short and long-term.
Let’s get into what you need to know.
Understanding The Key Differences Between Cash Flow and Profit
Though the terms are sometimes used interchangeably, they have different meanings.
Cash flow refers to the money moving in and out of the firm. It’s the funds that you use to pay for current and upcoming expenses. Think of it as the common cliche considered the cost of doing business.
Profit refers to your net income. Your profit is the remaining money after taking all expenses into account. Lack of profit means that you aren’t netting income.
However, even if you are accruing profit, poor cash flow can create massive problems. These problems can rupture your profit. For example, if you have a profitable business, but you run into vendors who don’t pay you- or clients who start flaking- you’ll run into profit problems.
Both are essential aspects of a business. Successful companies need to generate healthy profits while operating with sufficient and effective cash flow.
In some businesses, cash flow is more important than profit. This is the case if and when money may be tied up in various accounts or assets- leaving limited to no cash to pay employees.
No matter the industry, cash flow is necessary to keep a business running- both in good times and bad.
Organizing Your Business Cash Flow
Not sure how productive your cash flow process is? You may need to audit your business practices. Let’s examine the must-know tips.
Keep Business And Personal Accounts Separate
Whether you’re running a local restaurant or you hold dreams of launching a worldwide corporation, you must always keep your finances separate.
Before you even make your first transaction, you need to open a business bank account. From there, you should receive the appropriate business credit card, debit card, and checks.
This simplifies your taxes. In the event of a tax audit (whether it’s business or personal), this simplification is critical.
Maintain A Realistic Budget
To identify your cash flow, you need to locate both your incoming income and expenses. All successful businesses have a birds-eye view on their budgeting, and this perspective helps their cash flow stay on track.
First, you should assess your income sources. How much are you earning each year?
Then, you need to determine your fixed fees. What is your rent? How much do you need to pay employees?
After that, you’ll also need to include flexible expenses (those that don’t have a set price) and more substantial, one-time purchases.
Mind Your Spending
Just like we often spend too much on personal expenditures, it’s easy to overspend on business costs as well.
To maintain a healthy cash flow, you must be cautious and willing to scrutinize what you buy. Can you separate your needs from your wants? Can you get a cheaper product or service that still delivers the same quality?
Keep A Healthy Cash Reserve
Just like you need to have an emergency fund for personal expenses, you should have a business reserve for unexpected business costs. Having a financial cushion is well worth the peace of mind.
You can keep this cash in a business savings account. Aim to sign-up for a high-interest account that will earn you some extra money for saving.
Improving Your Cash Flow
Once understanding your cash flow, there are several steps you can take to improve it. Let’s examine.
Require Upfront Deposits
If you’re working with a new customer or taking on a large, custom order, it’s usually in your best interest to require a deposit.
Without a deposit, you risk delayed payment. If you don’t know much about the customer, you also risk losing out on money altogether. You also earn upfront money to float additional expenses as they accrue.
Simply highlight upfront deposits in your initial proposals or contracts.
Offer Payment Discounts
Tired of chasing down customers? Sending frequent invoice reminders is both emotionally and financially draining.
Instead, consider if you can develop an appropriate discount program that encourages fast payments. For example, what about offering a 3% discount if the fee is paid within a business week?
Penalize Late Payments
Just like it can be wildly effective to reward early payers, it can also be useful to take on the opposite approach for late payers.
Before signing contracts, outline your policy for late payments. At what point do you feel comfortable charging interest? When will you consider sending outstanding bills to collections?
Even if you can’t always act on these policies, having them in place is good practice. You’ll set the precedent that you take payments seriously.
Solutions For Cash Flow Problems
Are you facing some serious cash flow problems? Are you wondering if it’s too late to fix things? There are solutions available, and you should know your options.
Liquidate Assets For Cash
Have equipment or machinery that you no longer use? Consider selling them off to generate cash. You’ll free up precious room, and you’ll earn some additional income.
If things feel especially tight, consider selling off any inventory that you don’t anticipate using within the next year. Only keep it if the proceeds from a sale aren’t significant- or if there are little to no expenses for keeping it.
Consider Used or Leasing Equipment First
Used and leased equipment can be just as efficient as new equipment. Best of all, you can purchase it at a fraction of the original cost.
If you’re on the hunt for equipment, check online marketplaces or local auctions first. Inquire if paying in cash offers any discount.
When buying used, don’t forget to negotiate prices! If someone needs to get equipment off their hands, they’ll usually be willing to bargain for a lower rate.
Consider Bimonthly Payroll
It may not seem like a difference, but a bimonthly pay period schedule allocates 24 (instead of 26 pay cycles) per year. This can help reduce the costs associated with collecting and calculating payroll information.
Defer Payments If Possible
If you’re organized with your money, it’s wise to consider making your vendor payments on the last date possible. If they don’t have a penalty for late payments, consider extending it as long as possible.
Just make sure to read all of the fine print. You don’t want to create tension with your vendors, and you don’t want to accumulate interest!
Aim To Increase Your Sales
You should always be focusing on acquiring new leads. This tactic is obviously easier said than done, but it’s a cornerstone to any business’s success.
Can you beef up your marketing efforts? Improve your referral program? Launch a new campaign?
Increasing your sales can help provide you with a cash buffer. It can also help provide you with a spike in income that can offset debts.
Raise Your Fees
Are you short-selling yourself? Working harder than you need to be? Consider raising your prices to bring in more money.
Yes, this may feel scary. Yes, you may lose some clients. But ultimately, the clients you want to attract are the ones who are willing to pay your worth.
Say No To Risky Clients
Not every client who wants to do business with you is a viable one. As a business owner, you’ll need to sharpen your senses before agreeing to any impulsive contracts.
For example, what if you know the client has a reputation for causing trouble? Or not paying on time? Or leaving bad reviews?
Even if it’s challenging to leave potential cash on the table, taking on the wrong clients can result in costly mistakes.
Do you feel guilty asking clients for money? It’s time to change that mindset. You work hard, and you deserve payment for the products and services you provide.
If you wait a week to send out your invoice, it’s only expected that you’ll have to wait another week to receive payment.
Instead, aim to send out invoices within 24-48 hours. It shows that you value your work and don’t mess around with payment.
Hire An Accountant
Even though adding on this expense may sound counterintuitive, it will probably help you save money.
A good accountant understands the business tax code. He or she can support you in identifying ‘hidden’ business expenses. This can result in hundreds of thousands of dollars saved each year.
What If You Still Need Money?
Even after doing everything right, you still may be facing cash problems. This doesn’t mean you’re a complete failure! It merely tells you that it is time to problem-solve and try something new.
Fortunately, there are numerous financing options available to struggling small businesses.
A business loan can help if you anticipate large expenses and feel comfortable making reasonable payments for several months or years.
You can apply for loans through traditional financial institutions. You can also apply through several lenders online.
Business loan amounts vary. For example, the U.S Small Business Administration currently guarantees loans up to $5 million. However, loans can start at just a few thousand dollars.
Depending on your business, it’s possible to receive grant money to subsidize funding. You’ll need to send it an application to each organization.
Grants work like scholarships. You don’t need to pay the money back. However, they may be reserved for specific organizations, demographics, or locations.
Crowdfunding has grown in popularity over recent years. Platforms like Kickstarter and Indiegogo make it possible for entrepreneurs to “pitch” their ideas online. Sponsors or donors can donate or invest in the ideas.
Peer-to-peer (P2P lending is exactly what it sounds like. Ordinary people (as opposed to financial investors) can invest in business ideas.
These investors can lend their money to various businesses or individuals through online websites. You can typically borrow at low rates.
Friends and Family
In a study examining people who helped fund businesses, 32% of the respondents said their money went towards a friend or family members.
In other words, your personal relationships can help if your business is struggling. Just make sure that you outline your needs and expectations clearly. After all, things can become complicated once you mix blood with business.
Do you want these people to have equity in your business? Or is this more of a traditional loan with interest? Or is it just a gift?
Can’t buy used equipment? See if you’re eligible for equipment financing. If your business requires pricey equipment, this can help you improve your cash flow.
You need to be sure that you’ll need the equipment. If not, you’ll be stuck paying for something obsolete. And that won’t be productive for anyone!
Lines of Credit
Lines of credit enable you to borrow against your outstanding invoices. In other words, your invoice income helps pay down your loans. You receive access to your cash even before the customers make payment.
Maintaining a stable cash flow for your business is a fundamental part of your company’s success. Fortunately, there are many tips for identifying and improving how and where your money can improve its money management.
Are you interested in learning more about successful business operations? Check out the 10 habits all successful business owners need to know.