It’s not unusual for small businesses to run into situations where they suddenly have too little cash on hand. This can happen no matter the industry or the health of the business. However, if your business was plagued by constant cash flow problems last year, resolve to optimize your cash management in 2018.
Improving your cash flow not only makes it easier to plan and budget for future growth, but it also gives you the money you need to handle day-to-day business fluctuations. From staying on top of accounts receivable and eliminating unnecessary spending to leasing business equipment instead of buying it, there are numerous ways to manage cash flow in order to improve the growth and profitability of your small business in 2018.
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Forecast Your Cash Flow
Forecasting your business cash flow helps offset uncertainty by projecting your income and expenses on a monthly and yearly basis. Create a log of the payments you need to make during the coming year, such as wages, rent, loan repayments, and taxes. Then list the cash that will be coming into your business, including customer payments as well as interest on savings and tax returns. Subtract outgoing cash from incoming cash to calculate how much money you will have on hand at any given time.
To manage your cash flow effectively, you need to keep an eye on your cash position on a regular basis. This enables you to respond quickly when you see cash problems coming and plan for large expenditures like purchasing equipment, hiring new staff, or expanding your marketing campaign without negatively affecting your cash flow.
Improve Financial Record-Keeping
When your books are disorganized, it is difficult to get a clear picture of your business income and expenses and determine whether or not you’re making a profit. Now is the time to start fresh and get your financial record-keeping and systems in order. Evaluate your invoicing and collection methods and make improvements so you will know what customers owe you and whether they are paying you on time.
If you haven’t already, invest in an accounting software system to help ensure that your business financials are accurate, reliable, and easy to understand. These programs can also help speed up your cash flow, reduce costs, and improve your budgeting. You might also consider working with an accountant who specializes in small businesses and can assist with cash flow review and forecasting and offer advice on ways to improve efficiency.
Keep in mind that if you plan to look for financing to grow your business in 2018, maintaining accurate financial records is vital. Prospective lenders are likely to request sales revenue, P&L documents, tax statements, and other financial data to determine the viability of your business. Failure to respond quickly with this information could raise a red flag.
Examine Your Payment Policies
If you’re having trouble with cash flow, take a critical look at the payment terms you’re offering to customers. You want to get paid as quickly as possible, so keep your terms short and make sure they are clearly spelled out on all invoices.
Make it easy for your customers to pay you by offering a range of payment methods. Consider offering customers an incentive for paying their bills in advance. For example, if normal payment terms allow a 30-day remittance period, offer a discount if the invoice is paid within the first 10 days. Create penalties for late payments as well, such as charging interest to invoices that have gone unpaid for too long. This can be beneficial if you find it difficult to follow up consistently with delinquent customers.
Have a Debt Collection Strategy
Debt collection plays an integral part in any small business cash management strategy. Outstanding payments owed by your customers can put a serious crimp in your cash flow, and these debts often are the result of not having an effective collections process in place.
Whether you are too busy or looking to avoid the unpleasantness of dealing with late-paying customers, it’s simply smart business to establish a collections process. Our customers often set guidelines that state at 30 days they send a written reminder, at 60 days a junior staff person calls the customer, and at 90 to 120 days the owner makes the call. You may have requested payment from the customer numerous times without results, but a call from the top executive is likely to be taken more seriously.
You can also use your accounting or invoicing software solution to send invoice payment reminders and help track delinquent accounts. Programs geared towards small businesses like Xero and Wave allow you to create and send customized reminders which can help prevent a difficult situation from escalating.
Eliminate Excess Inventory
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.
When it comes to outdated or discontinued inventory, know when to cut your losses and reclaim what cash you can. This may mean offering products at a discount, but you can still make money while clearing shelf space for items with the potential to be more profitable.
Negative cash flow is often found in fixed assets with ongoing monthly payments, such as vehicles and business equipment. Look at leasing company vehicles and machinery instead of owning them outright in order to gain tax incentives and avoid having your cash tied up in depreciating assets.
Make sure you are getting the best deals on insurance, phone and technology services, and other fixed expenses. Lowering staff overtime and reducing power and water bills to help create a more eco-friendly workplace can also cut overhead costs. Even seemingly small changes like economizing on basic office supplies like paper cups and printer cartridges can increase your monthly cash flow significantly, giving you more money to invest in company assets such as new processes and staff training.
Expect the Unexpected
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 Summit Financial Resources is not regulated like a bank, we 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.
Making a New Year’s resolution to optimize your cash flow will help ensure sustainable growth for your small business. For those times when cash is tight, we can help you get what you need to keep your business running smoothly.
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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.