Every business owner seeks a profit, but even a profitable business won’t survive without enough cash on hand to pay the bills.
Positive cash flow is a sign of financial health and good management. Yet owners of new and growing businesses often experience periods of negative cash flow—times when the cash going out exceeds the cash coming in. This typically happens when a business owner needs to invest in equipment, office space, inventory, or employees.
You may not have the revenues to cover all of your expenses just yet and it may be a struggle to pay the bills until the hoped-for revenues begin to roll in. This is normal in the early stages of business growth, but how you manage your cash can make the difference between success and failure.
“Startups need to do whatever they can to keep track of their cash,” says Gene Marks, a certified public accountant who provides financial services to small business clients. “Running a small business is all about cash.”
These strategies can help you navigate times of growth, survive negative cash flows and come out ahead in the end.
1. Plan Ahead
A cash flow projection is a basic spreadsheet that gives you a realistic estimate of when money will be coming into your business, when it will be going out, and what you’ll have left after expenses are paid and income is recorded. It’s a guide, not a precise forecast, but the results will allow you to anticipate your cash flow for the weeks and months ahead and take appropriate action.
For example, when a shortfall is projected, the advance notice gives you time to perhaps negotiate payment dates with suppliers or secure a loan well before trouble strikes. If a surplus is anticipated, it may be the right time to make purchases or set funds aside in reserve to cover future lean periods.
2. Do the Math—or Delegate
In order to stay on top of your cash flow, basic accounting skills are a must.
“You have to know your payables and receivables,” Marks says. “You have to be into your numbers and comfortable with them. My most successful clients know math. They understand cost and profit, and when their customers will pay.”
Take a course on the business accounting basics or, if math isn’t your strong suit, Marks recommends setting aside money in your budget for an accountant who will take care of the numbers for you.
“Focus on what you do best and delegate the rest,” he says. You can also use an online cash flow calculator to get you started.
3. Monitor Your Cash Flow Every Day
It may seem tedious to focus on the details of cash flow accounting when sales and revenue command your interest and your attention, but daily cash monitoring will help you avoid unpleasant surprises.
“Every day, know what your cash is, what your receivables are, what your payables are,” Marks says. “Know over the next 30 to 60 days what you expect to come in and go out. Always know what’s coming down the pike.”
If daily monitoring reveals a downward trend, take immediate action. Contact overdue customers, cut down on non-essential purchases, raise your sales quota—whatever adjustments will help steady your cash flow and turn it around.
A range of tools is available to simplify cash flow monitoring. Andrew Lattimer, a CPA with the Blum Shapiro accounting firm, recommends using an online dashboard that provides an at-a-glance view of your daily standing. You can use an Excel spreadsheet, or choose from a broad selection of cash flow management tools and apps that are available on the market today.
“When you turn on the computer in the morning, you’ll understand your cash, receivables, inventory and debt, and know your starting position for the day,” he says.
4. Keep Cash in Reserve
“Any good business has cash in the bank to pay the bills in the event of a downward dip,” Lattimer says.
For established businesses, three to six months of reserves are generally recommended. Startups and growing businesses may need to be more conservative. To determine the reserves your business needs, consider the amount of cash you’ve spent in the past and your anticipated needs in the months ahead, then have a plan for securing the cash you need.
The best time to seek more cash is before you need it. Reserves may be funded in a range of ways, whether through your own business profits, credit cards, family or friends. Securing a loan or line of credit can also relieve short-term shortfalls.
“No company should be 100 percent in debt or 100 percent debt-free when cash flow is tight,” Latimer says. “If a small business is too cash tight, it’s difficult for the company to grow. Consider the ramifications of taking on some debt to ease your cash flow pain.”
Whether this makes sense for you depends upon your business spending habits.
“Getting a loan is fine if you can service it and pay it back over time,” Marks says, “but banks aren’t thrilled about loaning to companies with negative cash flow.”
Prepare in advance for the eventuality of needing to tap into an outside source of cash. Shop around and arrange for the best terms. A line of credit at your bank can be a convenient source of funds to draw upon as needed.
5. Improve Receivables
The obvious and optimal way to increase your cash flow is to increase your sales to new customers and existing ones. But that takes time, and while business growth is a solid strategy for the long term, it may not increase your cash flow in the short term. A quicker remedy is to improve the speed in which you invoice customers and receive payment. Send invoices out promptly, offer discounts for quick payment, charge late fees and follow up with customers who are slow to pay.
6. Manage Payables
When cash flow is tight, keep a watchful eye on your expenses, including your inventory, and cut where you can.
Lattimer recommends following principles of “just-in-time” inventory.
“Keep your inventory lean so there isn’t a lot of lag time between buy and selling,” he says. “If you own a pizza parlor, have enough dough for the 100 pizzas you know you’ll sell, not 500.”
7. Benchmark Your Business
Lattimer also recommends benchmarking as a means to compare different aspects of your operation against industry norms, such as costs, profit margins, inventory ratios, debt ratios and much more. Ask your CPA firm or regional Small Business Administration office about benchmarking services. A custom report tailored to your industry can help you stay competitive by highlighting the areas where you can take steps to improve your operations.
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