A critical part of running a small business is managing cash flow. In fact, it is more important that being profitable. As long as you have cash on hand you can make payroll, keep the lights on, and pay for inventory. Think of cash flow as the life-blood of your business. Without it, your business would wither and die. As such, here are some cash flow tips for small businesses.
Unexpected expenses can put a dent in your cash planning. It could be a critical piece of equipment or a loss due to an unexpected event like a robbery or a flood. While it is impossible to plan for every contingency, one crucial step in managing cash flow is to expect the unexpected.
This might mean establishing a rainy day fund or even having a lender you can trust when you need cash fast. If you are looking to a lender, then make sure they have a good reputation, and they are transparent about their lending practices.
Some simple steps to avoiding surprises are to understand the financial standing of your business at all times. This could mean looking at last month’s performance, or producing weekly or monthly sales forecasts based on the trends which matter to your business.
Make Your Cash Work for You
Unfortunately, most small businesses work for their cash. This is actually all wrong. Your cash should be working for you. This means, moving some of your non-essential cash into interest-earning accounts and looking to limit bank fees.
One simple way to do this is to batch payments to suppliers. Why should you pay for 10 separate payments when one payment will do? Also look at your payroll cycle. Do you need to pay your employees weekly or can you pay them every two or four weeks? If you have employees, then you should have a system to handle payroll. Now this could be a special account with your bank, or bringing on a third party service to handle payroll.
In the end, your cash should be working for you not the other way around. Talk to your accountant and your bank about simple strategies which will allow the cash your business generates to earn more cash for your business.
Set Expectations with Your Customers
Your customers are important. You know it, they know it. But you also need to manage their expectations. This goes beyond the level of service you provide. You need to set straightforward payment terms and make sure you stick to them. One the easiest ways to create cash for your business is to incentivize your customers to pay faster. This includes make invoicing for the work your highest priority.
Once you have invoiced, you also want to make sure you get paid in a timely manner. You would be surprised how many small businesses have a hard time collecting payments from their customers. Don’t let this happen to you. Set clear terms and simple procedures for payment. Also, make sure your customers understand what will happen if they don’t pay on time.
Get the Best Possible Terms from Your Suppliers
As mentioned getting paid quickly is important. But you don’t want your bank account to be a revolving door. This means working with your suppliers to get the best possible terms. This just isn’t payment terms – though they help. You want to get discounts and you want to have the option to return any unsold inventory.
A big part of this is managing the relationship with your critical suppliers. One tip is to look for opportunities outside of general day-to-day contact. Your suppliers know if you are only calling on them for favors. In fact, they probably have a list of customers who they will work with. Whilst being on that list is important, you want to make sure they view you as important to the success of their business.
You can achieve this by sharing information on what is happening in the market, and by trying to build a relationship with the key people in your supplier’s business. After all, they are more likely to help extend payment terms and other benefits if they know and like you.
It is your small business, so it is your responsibility to manage cash flow. This starts with being prepared for whatever comes your way. Then having a plan. This might include knowing when to turn to a lender for a short-term loan.
In addition, remember that your money should work for you, not the other way around. Set expectations with your customers and work with your suppliers to get the best terms possible. Whilst managing cash flow is not rocket science, it is vital for the success of your business.