For new businesses, cash flow is an important element of money management.
Having adequate funds on hand to cover financial obligations, especially when revenue is uncertain or inconsistent, is a key part of managing a small business.
As seen in the recent post, The Essential To-Do List for Would-Be Business Owners, developing and reevaluating your budget is a big part of sound fiscal management.
Put simply, cash flow is the pattern by which companies take in payments for goods and services versus how much is being shelled out for expenses. Here are seven ways to manage your business cash flow wisely.
1. Know Your Breakeven Point
Do you know when your business will become profitable? It is the point when your income outpaces your expenses. Knowing this point gives you a clear target to aim for in terms of necessary cash.
2. Do Not Focus on Profits
This may seem counter-intuitive, but it makes sense when viewed from a cash flow perspective. Once you reach your break-even point, continuing to focus on cash flow helps ensure you have the funds necessary to meet your future obligations.
3. Focus on Receivables
Collections are a necessary part of business life. Making sure your customers pay on time helps to ensure you have the cash you need when you need it. If you are not a fan of collecting payments, make sure there is someone on your team who is persistent and persuasive or outsource the work to a professional agency that will be diligent about bringing in the cash.
One way to encourage payments faster is to offer your customers discounts for prompt payments. If you offer credit, have policies in place about to whom you offer credit and under what conditions. Be consistent with these terms to ensure you do not get burned by customers who do not pay or who pay late.
4. Delay Receivables
Work closely with your vendors, suppliers, and other entities with which you do business to get the most favorable terms. Businesses operate in terms of “net-30” or “net-60” terms, meaning the balance of the invoice will be paid within 30 or 60 days of the service or product being delivered. If you can negotiate net-60 or net-90 terms, your business has more flexibility to pay, which is helpful when cash flow is tight.
5. Look at Variable Costs
You should be reviewing your budget regularly to make sure you are not overpaying and that you can find opportunities to cut expenses somewhere. One area to explore is your variable costs, those that are not a monthly constant regardless of your cash flow situation.
Your employee count is one area where you may find some wiggle room. You may want to consider going with fewer permanent employees and hiring temporary staff for busier times of the year. Additionally, equipment costs might be better managed by leasing equipment when it is needed instead of paying for it outright.
6. Ask for Better Terms
Remember that your vendors are as invested in your business as you are. If you succeed, they succeed. Good vendors think of themselves as partners. Working with them to obtain more favorable terms, whether via longer payment terms or better discounts, serves you both well in the long term.
7. Maintain Reserves
You need to have cash on hand to prevent the inevitable dry spells that occur for the vast majority of businesses. Having some reserves available helps you to manage the uncertain times when accounts are not paying, or sales are slower.
Knowing your funding options for the slow times can provide you with the extra padding you need. At Benetrends, we have pioneered a sound small business funding strategy that provides companies with cash for startup or ongoing operational needs.
The Benetrends approach helps businesses leverage existing 401(k) or IRA funds to provide access to interest- and penalty-free funds quickly. To learn more about how Benetrends can help you better manage your cash flow, schedule a consultation today.