There are many elements involved in building a thriving business, from achieving product/market fit and hiring a strong team to maintaining a competitive edge. However, studies show that 82% of small businesses fail due to one major factor: cash flow mismanagement.
Managing finances is not every small business owner’s strong suit, but avoiding cash flow problems is critical to small business success. Ensuring steady cash flow gives you the money you need to handle day-to-day business fluctuations and makes it easier to plan and budget for future growth. There are numerous ways to get a handle on your cash flow and improve the financial health of your business in 2019. You can begin by addressing the following fundamentals:
Establish a Budget
Creating the right budget for your small business can help you gauge performance, explore growth opportunities, and achieve your short and long-term goals. Establishing an effective budgeting process also improves your chances of success by helping you anticipate spending, profits, and cash flow as well as identify and address potential problems.
Without a budget, a business runs the risk of spending more money than it is taking in or not spending enough to be competitive. Putting together a realistic budget will allow you to track cash and business expenses and determine how much revenue you need to fund or expand operations. This process is essential for small business owners who want to ensure that enough money is available to keep their operation running, cover emergencies, and compete effectively in the marketplace.
Staying within the limitations of your monthly business budget isn’t always easy, especially when unexpected expenses arise. However, financial issues for businesses are often the result of a lack of monitoring or the small, but steady expenditures that build over time.
Manage Your Inventory
Poor inventory management can directly impact cash flow in multiple ways, from the cost of paying for more inventory space than you need to the loss of customers who grow tired of waiting for backorders to be filled. Yet statistics show that 43% of small businesses do not manage their inventory properly.
Review your inventory regularly with the goal of maintaining the right amount and type of stock to increase sales, acquire new customers, and sustain positive cash flow. Having too much stock or too much cash tied up in slow-moving inventory can have a negative impact on cash flow, while too little stock can result in lost sales and failure to meet customer expectations.
Avoid buying inventory simply to stock the shelves for future orders or purchasing a product in hopes that one day your customers may want it. It may end up taking a very long time to turn these goods back into cash. When it comes to outdated or discontinued inventory, know when to cut your losses. This may mean offering products at a discount, but you will be able to use the cash to purchase items that have the potential to be more profitable.
Review Your Terms
If you’re having trouble with cash flow, take a look at the payment terms you’re offering to customers. Once you’ve pinpointed trouble spots, consider making changes to address them:
- Keep terms short: You want to get paid as quickly as possible, so avoid agreeing to extended payment schedules. This can be difficult to negotiate, especially with large companies that dictate their terms. However, if the impact on your cash flow will put your business in jeopardy, you need to seriously consider if getting their business is worth it. If it is, invest the time in finding a solution that works for both of you.
- Offer early pay discounts: Give customers a discount for paying their bills ahead of time. For example, if normal payment terms allow a 30-day period for remittance, offer a percentage discount if the invoice is paid within the first 10 days. This provides an incentive for customers to pay early and help you collect the cash you are owed.
- Establish penalties for late payments: Add interest to any invoice that has gone unpaid for too long. This can be beneficial if you find it difficult to follow up consistently with customers when they are late in paying.
As a best practice, spell out your terms clearly on every invoice and issue invoices promptly following a transaction. Customers may be late in paying, but if you are slow to send the bill, it can put you further behind on collecting receivables.
Create a Cash Reserve
Creating an emergency fund is the best insurance your small business has for continuing operations in the face of unexpected financial issues or helping you recover from an unplanned, costly event. In a small business where every penny counts, setting cash aside “just in case” is easier said than done. You will need to save more, spend less, or both.
Talk with your accountant or financial professional to determine how much of a reserve you will need to build. Three to six months is typically a good rule of thumb, but you may need more depending on current industry or economic conditions.
One way to make sure you’ll be in a position to control your circumstances during a financial downturn is to shift your mindset to include savings as part of your annual business budget. If your business is seasonal, seize the opportunity to stash additional cash in your emergency fund during the months when you generate higher profits. This will make up for periods when revenue is on the lean side.
Have a Backup Plan
Even the healthiest small business can suddenly have too little cash on hand. Business financing is a valuable tool for helping business owners bridge gaps in cash flow when unexpected situations arise. Summit Financial Resources offers a number of options to help you cover shortages, including invoice factoring, asset-based lending, and inventory financing. These programs allow you to harness the cash in your accounts receivable to cover day-to-day operations, purchase inventory or equipment, or meet payroll.
Because we are not regulated like a bank, Summit Financial Resources can structure more flexible deals, take more risks, and make funding decisions quickly. We partner with our clients to create custom financing solutions with reasonable rates and structures that banks and other commercial finance sources cannot provide.
Effective cash flow management requires focus, discipline, and a commitment to paying attention to the details. While at times this may be tedious and challenging, it is essential to maintaining the financial health of your business.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.