5 Cash Management Tactics Small Businesses Use to Become Bigger Businesses Reaching your highest potential as a business owner depends on maintaining positive cash flow.
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You may have heard the phrase "Cash flow is the blood that keeps a business alive." This couldn't be truer, as consistent positive cash flow can help a business owner pay expenses, invest in new opportunities or grow a business.
Fortunately, as small-business-owner optimism remains high, most owners expect a healthy cash flow this year. The January 2018 Wells Fargo/Gallup Small Business Index found 77 percent of small-business owners rated their company's cash flow as very good or somewhat good over the past 12 months, up from 73 percent in November 2017.
To help with managing cash flow, here are five tips you should consider:
1. Spread out your payments.
Paying all your business bills at the same time rather than spreading them out can drain your disposable income and leave you at risk of not being able to pay your creditors and suppliers if an unexpected expense occurs. Instead, try paying your bills closer to the due dates and negotiate with your vendors to see if you can extend your payables to 60 or 90 days. Also, be sure to pay your most important bills, such as rent and payroll, before paying less important bills.
Check with your vendor to see if you can receive discounts for paying any bills early. Remember to pay all your bills before the due date to maintain a good credit standing.
2. Collect payments quickly.
Another way to improve cash flow is to incentivize customers to pay early by offering discounts.
Other techniques for collecting payments quickly include requiring deposits from your customers when taking orders and offering online payment options. Thanks to advancements in technology, there are multiple ways for your customers to complete quick and efficient transactions with your business. One example is electronic billing, which allows for you to customize invoices and set up automatic payment reminders for customers.
3. Establish a strict credit policy.
It's important to be wise about extending credit as a business. A non-paying customer can be a hefty expense to a small-business owner. Establish a written set of standards for determining who is eligible for credit, and enforce those standards rigidly. Also, be sure to require a credit check for all new customers before extending credit and monitor your accounts to identify late payers early so you can offer them a variety of payment options. These options might include a credit card charge or a payment plan.
4. Align your payroll cycle with your revenue stream.
Some businesses, such as restaurants and retailers, generate daily revenue and can more easily cover the expense needed for weekly payroll. For others, such as manufacturers, this could be a challenge, and you may benefit from paying employees less frequently, provided applicable wage laws allow you to do so. Refer to your state Department of Labor for pay frequency information.
5. Plan ahead for cash shortages.
Expect the unexpected. Typically cash flow will vary, and unexpected expenses will occur even for established businesses. Keeping a rainy day fund with three to six months of basic operating expenses in a reserve can prepare you for slow periods and emergencies. Another option is to use a business credit card or business line of credit to pay for everyday expenses and help bridge gaps in cash flow. Be sure to monitor your expenses with online banking and monthly statements.
One important tool for planning ahead is a cash flow forecast, usually a one-year prediction of how cash will move in and out of the business. This helps business owners evaluate how profitable future sales will be, and provides an overview of what needs to be done to reach your goals. In its simplest form, a cash flow forecast should show where cash balances will be at certain points in the future so you can anticipate and prevent cash shortages. To get started, organize your payables and receivables on a spreadsheet to see where money is coming and going.
Ultimately, reaching your highest potential as a business owner and being able to serve your customers effectively depends on maintaining positive cash flow. Following the tips above may help keep your business financially strong and position your company for success.