No two words bring more mixed feelings than “cash flow." Cash flow—the balance of money coming into and going out—is top of mind for virtually every business owner. And rightfully so. Improper cash-flow management could lead to a failing business.
Your payments may come immediately from a customer purchase, or over time once you collect on a late invoice. Meanwhile, your expenses may be consistent overhead, like rent and utilities, or hit unexpectedly—like after a spike in the price of your inventory.
To ensure a steady, positive cash flow, your job as a business owner is to minimize those unexpected expenses and maximize your tools for creating a profit or covering lapses. Here are seven ways to help keep things on track.
1. Model and forecast your cash flow.
The best way to understand your current cash flow is to build a cash-flow model. Consider creating a spreadsheet showing your current inflows (customer payments) and your current outflows (rent, utilities, loan payments). You'll end up with your net cash flow and ending cash balance for each week, helping you identify areas or times of the month when your positive cash flow is particularly weak.
Additionally, build out longer term cash-flow forecasts that take into account the costs of upcoming major expenses. This cash flow analysis will help you see if your current positive cash flow is legitimate, or the result of a time of the year when expenses are particularly low.
Lines of credit are a flexible funding tool to have in your back pocket. In case of emergency, you can use your line to cover any unexpected costs without missing a beat.
2. Adjust your client payment terms.
Nothing hamstrings a business like waiting for clients to pay their invoices. Typical payment terms are “Net 30," meaning clients have 30 days to pay for goods or services rendered—but you can bet that many of them will take all 30 days to do so, or will pay even later, citing their own cycles.
Where possible, cinch down your client payment terms and insist on quicker repayment. Some clients will put up little argument about paying after 15 days instead of 30, and even a few extra invoices that are paid COD (cash on demand) or within a week or two can make a difference.
3. Use a business card to pay vendors.
Yes, we just got done discussing how difficult it can be when clients take too long to pay off an invoice. If you don't want to put your own vendors in a similarly difficult situation, consider using your business credit card to pay your invoices.
4. Acquire a line of credit.
A line of credit is similar to a credit card in that it's a revolving form of financing that doesn't cost you a cent until you draw funds from it. Business lines of credit, however, have much higher spending limits than cards, and borrowers can use them to actually withdraw cash.
Lines of credit are a flexible funding tool to have in your back pocket. In case of emergency, you can use your line to cover any unexpected costs without missing a beat.
5. Offer discounts for early payments.
When clients are still failing to pay your invoices promptly, consider offering discounts for early payment. Even a 3-5 percent discount for paying within the first 10 days can compel clients to send their money over.
Your overall payoff might be smaller, but you can then immediately use those funds in important ways, growing your business rather than stagnating while you wait for the full amount.
6. Review your expenses.
When reviewing your cash-flow models, balance sheets and other financial statements, keep an eye on your overhead as well as variable expenses. Are there areas that you could cut down without sacrificing efficiency or capability? How many petty cash expenses are you making each month that could be eliminated entirely?
If possible, one idea to cut costs is to bring some projects in house, rather than farm them out to freelancers and contractors. This can both reduce expenses and challenge your team to grow and become more effective in the long run.
7. Pay your taxes quarterly.
If you don't have an accountant on staff or haven't yet invested in quality accounting software, you need to stay on top of a few different things, one of which is paying your estimated taxes quarterly. Rather than being surprised—and potentially wiped out—by your tax bill every April, take the time to file quarterly state and federal taxes. These smaller, more regular expenses can be easier to manage than a lump sum at the end.
Cash flow is the lifeblood of your business. Even profitable businesses will find themselves struggling to survive if their cash flow is erratic, weak or negative. Take the time to make your inflows and outflows predictable and consistent, and you'll be able to focus your energy on what makes your business successful—rather than scrambling to connect the financial dots every month.
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