How to Manage Cash Flow

CASH FLOW! 

It’s not a giant surprise that one of the top 10 search topics for small business on Google this year is “How to Manage Cash Flow.” Every small business, and even big-business owner knows that cash is king and managing it properly is the key to turning a profit and being successful.

In today’s blog we’ll talk about cash flow and give you some tips to manage your own cashflow.

 

What is Cash Flow?

Cash flow is the movement of money in and out of a small business. Cash received is the inflow, where money spent is the outflow. A positive cash flow is when you have more money coming in than you have going out.

Cash flow is important, because it shows the “health” of a business overtime. A positive cash flow can help secure loans with lower interest rates, attract investors, and sustain your business overtime.

 

Cash Flow Difficulty for Small Business:

A recent study from Intuit (Quick Books) discovered that 61% of small businesses around the world struggle with cash flow. As many as one-third of surveyed small businesses said they were unable to pay financial obligations such as vendors, loans, payroll or themselves because of cash flow issues. Negative cash flow is also the main reason why 20% of small businesses fail in the first year.

 

Tips for achieving and maintaining a positive cash flow:

Let’s talk about things you can do right now to improve and maintain a positive cash flow in your small business:

1 – Send Invoices!

We are told that one of the most difficult things for small business owners and entrepreneurs to do is to ask for money. When it comes to cash flow, “put on your big boy/girl pants” and do it!  Don’t forget to send those reminders early and often, too.

If you are struggling with cash flow, you may want to send invoices as they occur, instead of on a 30-day billing cycle. Set your terms to net-15 days instead of 30-days.

2 – Collect Receivables:

Just sending invoices isn’t usually enough to get money coming in the door. Don’t be afraid to call to make sure the payments are being processed. Other receivables strategies could include:

• Request a deposit up front for large orders
• Offer discounts for early payment
• Consider online invoicing with payment options online
• Offer deep discounts on items that are not moving
• Offer automatic transfer and deposits
• Establish a credit policy and stick to it
• Move slow or non-payors to a cash-up-front type of sales only

 

3 – Lease Equipment, Instead of Buying:

Yes, it is often cheaper (over the long term) to buy instead of lease. However, leasing gives you several cash-flow advantages:

• Lessens short-term financial burden with the use of a smaller “chunk” of your capital budget.
• You can keep your equipment up-to-date easier.
• Repair costs are usually the responsibility of the Lessor.
• Equipment leases often qualify for tax breaks.

 

4 – Adjust Your Inventory When Necessary:

Check on the items that are not moving or being sold in a timely manner.  Selling them at a discount may not only get it out of your inventory but may give you immediate cash flow. Spend money instead on those items that are selling.

 

5 – Develop a Strategy for Paying Bills:

Spread out your payments and try to extend your payables as long as possible. This can be tricky – you don’t want to incur late fees or earn a bad reputation as a “non-payor” so make sure you pay your obligations – but maybe consider paying weekly or bi-monthly, instead of all on the 1^st of the month which can deplete your cashflow in one day.

Don’t forget to negotiate payments with your suppliers. Ask ahead of time your supplier’s payment terms and if possible, negotiate interest-free scenarios with longer pay-back terms. It will also help to time these payments with your actual cash flow.

 

6 – Establish Your Business Credit Before You Need It:

It’s a lot easier to get money when you don’t need it. If your business is running smoothly, open a line of credit so you’ll have a fallback if cashflow gets short. Often interest rates are lower and banks are more willing to lend money or lines of credit while your cashflows are positive. This type of strategy is particularly helpful for those businesses that tend to be seasonal.

 

7 – Consistently Evaluate Your Business Structure:

Especially now, as a recession looms, it is important to look at your business strategy and be willing to change or adapt. Different areas of your business operations can be updated for efficiency such as shipping costs, use of middlemen, extra employees, overtime and even stocking up on materials before a price increase hits.

Often outsourcing or hiring freelancers can provide cashflow benefits by allowing you to get the job done and avoid paying salaries, benefits and insurance.

 

8 – Take a Look at What You Are Spending Money On:

Make sure you are not treating your line of credit like “regular” income. Lines of credit have expenses such as fees and interest. Take a hard look at your interest rates and make sure you are making progress with your loans or lines of credit and not just paying interest.

Check other expenditures such as:

• Insurance rates (evaluate and “shop” annually)
• Utility rates
• Terms of payment to and from suppliers
• Overtime
• Number of employees
• Cost of goods (Is it increasing and are you changing your price to reflect the costs?)
• Petty cash expenditures

 

9 – Take Advantage of Technology:

The right technology and the right business structure can make a huge difference when it comes to cash flow. Technology can streamline your business processes and increase efficiency; and yes, you can even use it to project cash flow!

A great example of taking advantage of technology in a small business can be seen with online retailers who use automated systems to bill and collect, send shipping and tracking information, and even a thank-you for their purchase. These simple systems can cut down on having to pay your lazy nephew, who charges too much and messes up every order. Instead, it’s done automatically.

 

 

For additional information on how to get your cash flow going in a positive direction, or on the best way of increasing your cash flow, please contact us at the Small Business Development Center – SBDC – Serving Paris area:  Lamar, Hunt, Hopkins, Delta, and Red River counties.