Profitable businesses are able to survive and expand. Unfortunately, only half of the new businesses survive five years or longer, according to the Small Business Administration. One U.S. Bank study suggests that 82% of business failures are due to problems with cash flow.
Your business needs a healthy cash flow to survive. Cash flow can be difficult to manage, especially for small business owners just starting out. Small business cash flow management starts with understanding what cash flow is.
What is cash flow?
Cash flow is money that comes into and goes out of your business. You can have either positive or negative cash flow.
Positive cash flow is when you have more incoming cash (i.e., sales) than outgoing cash (i.e., expenses). Businesses strive to have positive cash flow.
Negative cash flow is when your business has more outgoing cash than incoming cash.
Though negative cash flow is not a good sign, it doesn’t necessarily mean your business is on the verge of bankruptcy. Work on cash flow management for small business to improve.
Tips to improve small business cash flow management
Constantly having more money leaving your business than coming in can be discouraging. Here are cash flow strategies for small business that can help.
1. Create and analyze your cash flow statement
A cash flow statement is one of the three main financial statements that lets you see your business’s financial health.
Cash flow statements show you the amount of cash entering and leaving your business during a time period. It shows you how much cash your business actually has. It does not include the amount of cash your business owes or the amount owed to you.
Compare several cash flow statements for your business. This can show you how your business manages cash over time. And, the analysis helps you project small business cash flow. That way, you can prevent overspending resulting in negative cash flow.
2. Adjust payment terms
Sometimes, negative cash flow is a result of customers not paying you. Extending credit to customers means you won’t receive payment right away.
Establish payment terms in writing to let customers know information like when their payment is due, how to pay it, and when late fees apply. Shortening payment terms might be a good idea to increase cash flow.
For example, you sell $1,000 worth of goods to a customer and give them six weeks to pay. By changing the payment deadline to four weeks, you have a better chance of receiving payment early on.
You can encourage customers to pay you early by giving discounts for early payments. And, you can discourage late payments by increasing the late fee.
Also, you could consider invoice financing or factoring to get cash from your unpaid invoices. Learn about the differences between factoring and invoice financing
3. Make a budget
You need to know how to create a business budget. A budget lets you predict the amount you will receive and spend. Sticking to your business budget is an important part of managing cash flow in a small business.
It’s impossible to know every expense you will have over a period of time. Include the recurring costs and leave room for unexpected expenses. Using a budget can help you spend wisely.
You don’t know how much your business’s revenue will be, either. Look at your business’s revenue from prior years to get an idea.
4. Increase sales
Wouldn’t it be great if increasing sales was as easy as someone telling you to do it? Your business thrives on selling to customers, but increasing the number of sales you make can take time.
To increase sales, spend time marketing to customers. Make sure people know about your offerings.
You can also offer discounts or promotions to increase sales. The lower prices might encourage customers to buy more of certain goods.
5. Get rid of unnecessary costs
Cut out any expenses that are frivolous. You might think that a $300 coffee maker would be a nice treat for your employees, but spending that amount is unnecessary.
Take a look at necessary costs, like rent, supplies, and salaries. You won’t be able to cut these, but you could shop around to see if there are better deals that can save you money.
For example, talk to other suppliers to see if they can give you a better price than your current vendor. Or, you could find ways to reduce cost-per-hire if you have too many hiring expenses.
6. Time Purchases
To make sure the amount of cash coming into and going out of your business line up, you need to time purchases. Timing purchases can be as simple as waiting to buy a piece of equipment.
Having expenses due and payable all at once can be hard. If you’re able to, spread out payment dates and purchases so you can better manage cash flow.
7. Form relationships
Forming relationships with your vendors, lenders, and investors can help them see you as reliable. Build connections early on, not when you need money.
For example, if cash is tight, your vendor might work with you on payment terms so you don’t need to pay large amounts all at once.
Again, cash flow issues spring up when you have too much outgoing money and not enough incoming money. During times of low incoming cash, reach out to your connections.
The importance of cash flow
Businesses need cash. To start, having cash on hand helps you pay for things your business needs, like equipment, supplies, and employee salaries. Without money, you won’t be able to operate.
Cash flow also determines the cash flow statement. Businesses show the cash flow statement to people like investors and lenders to secure investments and loans.
Healthy cash flow can indicate a healthy business. With small business cash flow management, you can get your company on the right track to success.
Rachel Gray is a content writer at Patriot Software, LLC, a provider of affordable payroll and accounting software for small businesses. At Patriot, she enjoys providing actionable, growth-oriented information for small business owners.