It’s not an exaggeration to describe cash as the lifeblood of your small business. When you have money on hand, you can pay staff, restock inventory and manage a slow sales stretch. Businesses that run out of cash risk bankruptcy, even if they’re profitable on paper. That’s why being proactive with small business cash flow management is so important.
“The time to deal with cash flow problems is before you actually have them,” says Dr. Steven J. Weil, Ph.D., EA, LCAM, president of RMS Accounting. “It doesn’t do much good for me to tell someone they’re broke only after they’re broke.” The COVID-19 pandemic hammered this point home as business owners faced shutdowns and shortages that were unimaginable just a few years ago.
To help improve your cash flow, here are a few tips and strategies you can use.
1. Review Your Current Cash Flow
The first step to improving cash flow is paying more attention to it in the first place. With cash flow analysis, you track how money comes in and out of your business, with the goal of making sure you have enough on hand to safely cover everything. Examine your inflows, or where you expect money to come in from sales, as well as your outflows, or where you spend on bills, payroll and other expenses.
As part of this review, it’s important to know your situation not just for today but for the future.
“People look at their existing bank balance versus their current bills, but that’s not cash flow management,” says Weil. “Cash flow management is knowing what you can rely on to come in for the future, as well as controlling expenses and outgoing payments when you have to.”
By paying more attention to your cash flow and trying to predict future trends, you can potentially predict issues ahead of time: If you foresee cash being tight in a few weeks, you can start planning for that crunch now. For help, you could use accounting software like QuickBooks and Xero. These programs track your transactions as they happen. Some also forecast what your future cash position will be based on this information.
2. Speed Up Customer Payments
The sooner you can collect project payments, the better it is for your cash flow. Whether it’s moving up the deadline on invoices, asking for some money upfront or adding penalties when clients are late on payments, aim to shorten the time between your business making a sale and actually collecting. Not only is this good for your cash flow, but it also prevents issues if a client is overdue or skips payment altogether.
Invoicing software like Square and Zoho Invoice can help with this process. These programs can prepare and send out invoices for you as well as payment reminders as soon as people are late. This saves you time and can speed up collections. To expedite things even further, Weil suggests accepting credit card payments.
“While business owners don’t like the idea of paying the 2.5% upfront fee on transactions, think of the cost and hassle of preparing invoices. Between putting them together, the postage to mail them, the emails back and forth with the client, plus the risk of the client not paying, that 2.5% fee to get paid right away is a good deal,” he suggests.
That fee usually ranges from about 1.5% to 3.5% — small potatoes compared to a missed bill.
3. Factor Invoices
Factoring invoices is the process of transferring an unpaid client invoice to a financing company, called the factor. The factor pays you a portion of the bill upfront, around 80%, and then takes charge of collecting payment from the client. Once the client pays, you’d get the rest of the money minus the factor’s fee.
“This passes the collection risk onto the factor because they’re assuming the debt,” says Weil.
Not only do you get the cash sooner, but you also don’t have to worry about the customer missing a payment. The factor fee can be considerable — potentially 5% or more of the invoice amount — so this small business cash flow management strategy doesn’t work well for low-margin sales. You need enough of a profit buffer to still come out ahead after the fee.
4. Avoid Overextending on Projects
Making sales and landing new clients is exciting, but it’s only half the work. You also need to make sure the client comes through on payment. This is where small businesses can get into trouble, says Weil.
“So many companies have been put out of business by a large customer that didn’t meet payment terms,” he says.
That’s why a more controlled growth strategy can be safer for small business cash flow management. “You might not become Amazon, but how many businesses go bankrupt and become nothing?” Weil asks.
If part of a deal means extending credit, ask yourself how your finances would hold up if the client ultimately doesn’t pay. If your business would struggle to absorb the blow, that’s a sign of overextending. Either push for more money upfront, or consider walking away.
5. Cut and Delay Expenses
If it looks like you have a cash flow crunch ahead, consider what business spending you can temporarily cut back on. Moves like skipping nonessential trips, delaying office renovations and leasing equipment instead of paying for it outright could preserve your money until you figure out how to increase cash flow again.
Not all these moves can be handled overnight — which is another reason why it’s useful to predict your cash flow ahead of time. That way, if you see issues on the horizon, you have more time and options for cutting back, rather than only realizing you have a problem when you’re short on cash for essentials.
6. Keep Cash in the Bank
More than anything, the COVID-19 pandemic has shown business owners the importance of having a cash emergency fund.
“I don’t think anyone imagined a situation where the economy would shut down and income would just stop,” says Weil.
Any disaster, from COVID-19 to a hurricane to a family illness, shows why having extra cash in an emergency fund can help. A good target is to have at least three months of business expenses saved up to buy yourself time to get back on your feet or apply for help.
7. Use Loans to Get Through Dry Spells
If you’re facing a temporary financial crunch, a small business loan is another possibility for how to increase cash flow. You’d get money upfront to cover bills, payroll and other expenses, which you can then pay back when your business catches up on customer payments.
If you do borrow, make sure you know how you’re going to pay the money back. If you have a big sale on the horizon and just need to wait for it to come in, great — but if not, it may be prudent to wait.
Besides outright loans, another option is to set up a line of credit. This would give you a set borrowing limit, which you can borrow up to, pay off and then borrow again. You don’t owe interest until you borrow against the line of credit. It could be worth launching one even if you don’t need money now so you’re ready in the event of a future cash flow need.
8. Be Ready to Negotiate
When times get really tough, try calling your vendors and letting them know you’re having trouble meeting the terms as-is. They could be willing to work something out, especially if you reach them before a missed payment deadline. During the COVID-19 shutdown, Weil found business owners often had no choice but to negotiate.
“I’d have a client reach out to their landlord and say, ‘We don’t have $5,000 a month for rent. At that rate, we’re just going to have to close. Would you temporarily accept six months at $3,000?’ The landlord was happy to keep their tenant around while it bought the business owner valuable time to recover.”
When times are tough, don’t be shy about negotiating with your landlord and vendors. Many would rather receive something than nothing.
9. Reach Out to a Financial Adviser
Professionals such as accountants, bankers and financial advisers could have ideas for how to increase cash flow.
“The value of working with someone outside your business is they can communicate and solve problems before they happen,” says Weil.
If you’re already working with someone, step up and ask for help. Weil appreciates this behavior as an accountant. “The clients I end up supporting most are the ones who come in for a visit or call me; they’re proactive about asking questions and setting up cash flow strategies,” he says.
By following these tips, you can put your business in a stronger financial position, regardless of what the world throws at you next.