For small businesses, unreliable cash flow can be catastrophic. Every year, many businesses have to close due to lack of cash flow. Even a short-term cash flow problem can make it hard to pay payroll, rent, or buy supplies.
There are many reasons for cash flow problems. A drop in sales, seasonality, unexpected expenses and customers who are late on payments. Payment delays, in particular, plague many small businesses, making it difficult to keep the lights on, let alone grow.
To help you not become another statistic, here are six cash flow management tips and best practices to help you grow your business that our experts at Fincue have put together for you.
1. Have a 360-degree view of your cash movements
One of the first things to do is get an overview of your funding situation. To achieve this, you will need a cash flow statement and a cash flow forecast.
A cash flow statement, like a bank statement, gives you a snapshot of your cash position at any given time and is usually prepared at the end of each month. It is a snapshot of the cash that has come into your business (profits, financing, etc.) and has gone out (invoices, payroll, inventory costs, debt, etc.).
The cash flow forecast, on the other hand, points to the next month, quarter, or even year. It is an invaluable tool to help you predict any issues before they occur so you can put mitigation measures in place. Use data from your cash flow statement, such as customer payment patterns, as well as sales projections, inventory plans, and other expenses to inform your forecast.
Most accounting software includes cash flow statements and forecast reports that you can create based on your existing accounting data.
2. Help your customers pay you faster
Unpaid invoices are a factor that greatly affects cash flow. Studies show that the cost of unpaid bills to small businesses is more than $825 billion. But you can take control and bridge the gap between billing and payment. Here are some ideas:
- Bill promptly – Don’t put off billing until the end of the month, as that will only delay the time it takes for the money to reach your bank account. Instead, invoice as soon as you’ve completed the job. If the project is large or ongoing, arrange to bill monthly or even use staged billing so you can bill at key project milestones and receive those payments faster.
- Find out how your customers prefer to pay – Many large companies use direct deposit or payment applications like Bill.com. Find out what your customer uses and make sure it’s set up properly to receive payments, which will minimize problems with late payments due to technical difficulties.
- Analyze your invoice layout – We’re not talking about fancy graphics, we’re talking about the clarity, neatness, and content of your invoice. Include important contact details, payment preferences (with links if possible), payment terms (as agreed in your contract), easy-to-read fonts, etc.
- Use a billing tool – There are several easy budget billing tools that can help you get paid faster. QuickBooks, FreshBooks, Wave, and Hiveage have a variety of tools that make it easy to generate invoices, track and dispute payments, issue automatic reminders, and integrate with your accounting systems.
3. Keep an eye out for bills that are due
Set up a system whereby you have visibility into which invoices are pending, or better yet, which are approaching their due date so that you can claim payment as soon as possible. Depending on your customer base, an Excel spreadsheet is a good place to start, but things become much more manageable when using accounting software.
4. Create a relationship with whoever gives you the check
Knowing the name and email address of the person giving you the checks is a big plus. Most B2B relationships are with sales, marketing, or other non-accounting personnel. But if you can get to know your accounts payable staff, you’ll be better positioned to get answers about where the payment is in the processing cycle and claim it directly if there’s a delay.
5. Have a financial cushion
One way to get ahead of cash flow problems is to maintain a financial cushion, usually in the form of savings. This isn’t always easy, especially if you’re worried about not having enough cash in the first place. Most financial planners recommend that individuals and business owners have 3-6 months of savings to cover expenses. This depends on your personal comfort level. Try to start small, increase your contributions over time, and use your cash flow forecast to inform your savings plan.
Another source of cash reserves is a business line of credit. Unlike traditional loans, a line of credit gives you more flexibility and can be used to finance hiring and purchasing or as a safety net when you’re faced with challenges like doing payroll during a cash flow crisis. Be sure to apply during a fiscally healthy period, then borrow when you need the cash and pay it back when you don’t.
6. Be strategic with your growth
Rapid growth can often lead to cash flow problems. Winning a new contract may mean you need to invest in new employees, but net terms of 30, 60, or even 90 days can result in late pay and a payday cash crunch.
Don’t shy away from growth opportunities, but use your cash flow forecast to keep an eye on how long it will take to pay off the debt you’ve taken on to grow (remember, a line of credit can help at this point, too). Look at each customer as an investment and ask yourself: am I making a profit and how long will it take to collect?