Cash–the oxygen that fuels small business–is flowing again, and that’s giving many entrepreneurs a chance to breathe easier.
The Wells Fargo Small Business Index for the third quarter found that cash flow in the firms it surveyed had reached a six-year high. Among respondents, 55% of owners said their cash flow had been good or very good over the past 12 months. That’s up from 50% in the second quarter of this year and reflects better access to credit.
Nonetheless, conditions can change quickly, as we saw in the last recession. When times are good, it’s the perfect time to sharpen your skills in managing cash, so you have enough on hand to insulate you if there is a sudden slowdown.
“A fairly large percentage of small businesses end up in some sort of crisis over cash in the first couple of years of their existence,” says Dave Kurrasch, a former senior vice president at Wells Fargo and current vice president and general manager of Small Business Payments Company. “That’s why the fatality rate in small business is so high.” Kurrasch’s company, a US subsidiary of Acxsys Corporation in Canada, offers a product called Small Business Workbench that aims to simplify working-capital and cash-flow management for small business owners. He estimates that 30 to 40% of small business failures in the first three years stem from a working-capital crisis.
Here are some tips on how can improve your cash flow, based on a recent conversation with Kurrasch, so you have enough money to keep going, no matter what the economy does.
Keep your eye on the future.
Every business owner should look ahead by at least six to 12 months to figure out how much cash is likely to be flowing through the business, Kurrasch says. Many accounting programs will help you do this. This will help protect you from wild swings if you need to add people to payroll during a seasonal uptick or must buy a new piece of equipment. “Those things should be properly forecasted and planned well ahead so they can ask their banker for assistance,” says Kurrasch.
Get paid faster.
When you’re busy, it’s easy to let invoicing slide, but that’s dangerous to the survival of your business. You will greatly improve your cash flow if you establish a regular discipline of invoicing, collecting payments and getting them into the bank, says Kurrasch.
To speed payments further, consider using tools that let you accept credit cards, such as Square or Apple Pay, so you get paid more quickly, he says. “They are very easy to use and can accelerate how people get paid,” he says. Scanning checks remotely through mobile payment tools that let you deposit them directly in the bank can also accelerate your cash flow, he notes.
And if you’re still mailing invoices (you’re not, I hope!), switch over to electronic invoicing tools, he suggests. Your invoices will reach customers a lot more quickly.
Rethink your inventory.
Mistakes in this area can kill a business if you’re in retail. “Either not having the right inventory, having too much inventory or having the wrong type is probably the retailer’s biggest problem,” says Kurrasch. Failing to master the discounting process can also hurt you. If you’re having trouble with making the right calls on your inventory, consider getting help from a retail consultant.
A final word: Sometimes, a business has cash-flow problems because it’s not making many sales. When that’s the case, it’s a red flag that you should reexamine your business model. “If you’re not generating any cash, more than likely there’s not a good reason for being in business—unless you like being a not-for-profit,” says Kurrasch.