Own a small business? How you can improve your cash flow management(Read article summary)
One of the most essential jobs for a small-business owner is ensuring that enough money is coming in — at the right time. With the right prioritizing, it's easy to make sure you always have enough cash on hand.
One of the most essential jobs for a small-business owner is ensuring that enough money is coming in — at the right time. Managing cash flow well means that you have money to pay bills during slow times. Managing it poorly could mean the end of your business, no matter your revenue.
We asked Dmitriy Fomichenko, a financial advisor in Anaheim Hills, California, and a member of NerdWallet’s Ask an Advisor network, for his thoughts on how to keep cash rolling in steadily. He offers a series of tips to help business owners prioritize.
What should entrepreneurs know about cash flow?
Managing business cash flow is one of the most important factors in the success of a small business. Here are a few tips:
Develop cash-flow projections
These should be not only in your head but also on a spreadsheet, and keep them as detailed as possible. Projections should include realistic assessments of how much money you expect to have coming in and when. It also means taking into account slow months, whether through seasonality or other reasons.
Prepare a backup plan to handle short-term cash-flow problems
This involves arranging for working capital financing before you need it so that you’re ready to [fulfill] a big order instead of looking for funds. Being proactive with working capital financing allows you to deal with inconsistent cash flows and protects you from shady short-term lenders in your hour of need. You can start by applying for a line of credit way before you need it and tap into other possible resources (private funding or “friends-and-family” funding).
Keep decent cash reserves
As a new business you will not get the best supplier or vendor payment terms. Having some money set aside will put you in a better position to handle the periods between purchasing inventory and waiting for revenue to come in, when bills are coming due.
What is the best way to set up cash-flow projections?
It depends on the size of the business. A small business may need only a simple projection template to calculate business cash flow, whereas a larger one may require comprehensive software. Here are a few options: Score.org offers useful information, templates, tips and resources for small businesses. Google Docs offers a variety of cash-flow projection templates. You can also use web apps such as Pulse and Dryrun.
What are some strategies to keep cash flow steady?
Many businesses struggle to pay bills, even though their overall revenue is relatively healthy, because the money is not available at the right times. Here are a few ways to manage that:
Ask for a portion of customer payments upfront
Depending on your business, asking for 30% to 50% is advisable. It will help you build cash reserves and bear production expenses. With a fair payment policy, customers are not likely to have a problem.
Bill biweekly instead of monthly
More frequent payments, even if smaller, will bring in a steadier stream of cash to pay bills.
Offer discounts for early payments
For example, offer a 2% to 5% discount if the customer pays within 10 days of the due period.
Invest in an efficient invoicing method
Some small-business owners, and for that matter even larger ones, rely on [mailing] invoices, which could cause unexpected delays. Setting an efficient invoice system means offering digital invoices (small-business owners can use PDFs to do the same), preparing invoices in advance, rewarding customers for early invoice payment, offering a marginal discount for cash-on-delivery upfront payment, and sending late payment reminders to customers. These strategies ensure that you keep a steady cash flow.
What are some options when cash flow goes negative?
There are several things to do, including analyzing your budget, figuring out ways to cut costs, reviewing your payable accounts, focusing on collecting any past-due payments, and increasing sales and revenue streams. These ideas can be easier said than done.
One thing that many owners don’t do is to make sure their entire team understands the crisis. Don’t keep the true situation from your employees; otherwise they’ll think everything is fine and won’t feel the required sense of urgency. Your employees need to be working toward a solution right along with you.
Dmitriy Fomichenko is the founder and president of Sense Financial Services in Anaheim Hills, California. Learn more about Dmitriy on NerdWallet's Ask an Advisor. This article first appeared at NerdWallet.