You know the drill: managing cash flow is one of the biggest stumbling blocks of a budding small business. As a daring entrepreneur, you have to be wary of various pitfalls and apply tried-and-true methods of financial management to stay afloat.
But here is some great news for you: you don’t need an MA in economics to regulate your cash flow successfully. It comes down to solid and comprehensive strategizing. Here’s how you can do it with these vital tips.
1. Lay the groundwork: set a realistic budget with a backup plan
You must have an estimate of the cost and length of a sales cycle based on the product or service you are offering. This should be the first part of your equation.
The second part is all about the operating expenses: what equipment you require, maintenance, rent, supplies, payroll, etc. Don’t forget about taxes as well!
The correlation between the expenses and the sales cycle will leave you with a budgetary estimate that you need to monitor on a monthly basis. That’s the groundwork of your cash flow management.
You also need to develop a backup plan handle unexpected expenses. This entails on-hand money reserves and an established relationship with banks or business lenders (or both). You’ll have to provide operating statements for them as proof of business stability to apply for further loans, which gives us the perfect segue for the following tip.
2. Choose verifiable (modern) lenders over banks
You know what the first objective of every bank is: to be paid back, with interest. Therefore, any bank will think thrice before lending to a small business in dire straits. Additionally, banks come with so many strings attached: rules, administrative nightmares, incomprehensible game-changes, and commissions.
You’d be better off with reliable lending businesses and establishing a dependable relationship with them. Thanks to the expansion of the alternative lending market, the dynamics of the cooperation between small businesses and lenders are heading in a far better direction. In a testimonial video for Cube Funder, a company offering modern lending solutions, one client points out that when choosing who to lend from, she looked for “a business relationship, as opposed to just borrowing.” This relationship includes a team environment, mentorship, and support with making growth-oriented business decisions.
Such lenders are specialized in helping out small to medium-sized businesses like retailers, hotels, bars, restaurants, beauty parlors, as well as vets, dentists, opticians, and even auto garages. Their flexibility is a breath of fresh air for modern entrepreneurs, but keep in mind that transparency is a two-way street. Keep updating those operating statements!
3. Bill your customers on time, and teach them to pay up
Let’s go back to the topic of sales cycles. Establish an automatic method of billing your customers in accordance with the way your business operates (i.e., creates a product). This is fairly easy to do with online invoices and digital receipts, so that’s not where your potential problem lies.
In the ideal world, your business receives payment on delivery, but this is usually not the case these days unless you offer services ‘on the spot’ (as in the case of restaurants, bars, beauty parlors, and such). You can speed things up by offering discounts for express payments. It’s an excellent incentive to ‘train’ your customers to pay up on time.
Follow-up letters with payment demands and, ultimately, sending a collections clerk by the end of the month might be necessary measures to cover this aspect of your cash flow. You are perfectly ethically justified to treat a non-paying customer as an expense that disrupts your cash flow.
4. Spread out the expenses
While you should aim to get paid on time, you have to play a different game and make your own payments as late as possible. It’s the oldest trick in the cash flow book, and it works.
Naturally, you’ll also have to set up automatic payment methods that cash out on the final day when the expenses are due, just to avoid getting late with your fees. But as long as you can stretch it out, you’ll have more cash available to earn interest.
The accounting software you’ve set up while laying the groundwork or regulating cash flow will help you keep track of the due dates and expenses. It makes sense to spread it out throughout the month than paying in one large sweep, doesn’t it?
5. Regulate cash inflow and outflow
Some tips come down to small changes and tweaks that can make a world of difference to your business’ cash flow. Every single one of them can help you avoid small-business mistakes, and they can broadly be lumped into two categories: inflow and outflow hacks.
To maximize your cash inflow, you can bump up the prices according to non-standard customer requirements. For example, if a client demands a modified standard product or a service that goes over the boundaries of offered contracts, you can add clauses that demand additional payments.
Also, you can ask for mandatory security deposits that bump up to 50% if the client requirement is unusually large or demanding.
If you provide a regular service – whether it’s a magazine, maintenance of any kind, or an online game – a prepaid subscription is a perfectly viable method to ensure cash inflow.
In terms of minimizing your cash outflow, you simply have to be frugal. Purchase used equipment whenever you can, and don’t replace expensive equipment with new items unless you are positive that it is beyond repair.
While your business is struggling, consider using open-source software to reduce the costs of maintenance and upgrades.
Ultimately, whenever you see an opening to barter for services, supplies, and products – do it!
As a small business owner, keeping your head above the water comes down to prioritizing cash flow management over everything else. As far as other matters are concerned – namely, HR-related matters, daily operations, and sometimes even creative decisions, you’ll have to rely on your team.
Thankfully, small companies that count up to fifty individuals self-regulate these non-financial matters more easily because people are more familiar with each other than in the case of major corporations. Focus on your cash flow management methods, arm yourself with patience and perseverance through the typical business growing pains, and you should strike gold!