As a small business owner, you’re faced with many daily, weekly and lifelong challenges. One of the biggest challenges and most important is cash flow management. Mismanagement of cash flow creates cash flow gaps, which can literally put you out of business by missing a crucial bill like paying a supplier your business depends on.
A cash flow gap occurs when your expenses come due prior to revenues coming in. It’s not that you can’t afford your expenses, it’s just a timing difference – you don’t have the cash flow (yet) to pay the bills. For small business owners, cash flow gaps can occur from delayed payment terms, fluctuations in business, and an unexpected additional capital commitment to start a job.
Use the following tips to help avoid any pitfalls in your cash flow.
Cash Flow Management is a Frame of Mind.
Small business owners should operate in large, broad frame of mind that is always asking, “how does this affect my cash flow?”. Think about what the net benefits and costs are of each purchase you make or deal you book. Also try to think of the timing of it. Ask yourself if you have enough cash on hand or access to credit (i.e. like an American Express for business). If not, don’t book the order or agree to purchase anything, unless you have very favorable terms.
Map Out Your Dollar Life Cycle
To successfully manage cash flow you need to understand the road map of each and every dollar. Ask yourself this – if you take $1 right now, and deploy it into your revenue generating activities, how many rest stops will your dollar make? How many hands touch that dollar before it comes back into your bank account? How long will it take to get into your bank account? Understanding the flow and timing is crucial.
Be Conservative with Timing
You can be conservative with your cash flow management approach in 2 days, neither of which are mutually exclusive. First is to be conservative with the timing of revenues, and the second is to be conservative with the amount. Think you’re doing to get paid in 10 days? Call it 15. Issuing an invoice payable in 30 days? Bank on getting that money in 36 days. It’s important to add buffer zones to the timing of your income and expenses, to keep expectations in order. If you manage your expectations, you can manage your cash flow a lot easier. Also, you should underestimate sales. If you buy 5,000 units of a product and based on past data you expect to sell it over the course of 2 months, budget as if you’re selling it over 3 months. This way if things slow down, you don’t run out of money.
Build a Cash Reserve
Cash is king. It never, ever hurts to have additional cash on hand. Pay yourself $10-$20 per day, or something nominal. Make sure you can afford to set aside cash. Figure out what the number is, divide it by 21 (for each business day), and set aside that money into a separate reserve account. Having a cash reserve can be used as a way to bridge cash flow gaps if they occur.
Explore Invoice Factoring
Factoring your accounts receivable is a great cash flow management tool. Although it costs 1-2% per month, consider this a revenue share for outsourced cash flow management. With invoice factoring, you can pick and choose which receivables you want to sell on a daily, weekly or monthly basis and as you generate them, accelerate the cash from them. Let us know if you need help finding an accounts receivable factoring company, we’re happy to help.