I let my busy life distract me, but here I am! I have genuinely useful things to share with you today. Today’s topic is so important to me. Let’s get started!
Are cash flow issues concerning you?
The vast majority of small business failures is due to poor cash flow. Something in the realm of 90% of all failures are because of not having a handle on cash. It’s critical to the growth and success of your business to manage your cash flow.
The goal, obviously, is to build a cash cushion so there aren’t any cash flow issues. Easier said than done. Startups usually have to manage cash flow closely because expenses pile up before sales can cover all the costs. This doesn’t leave much room to build a cushion. It’s typical that, in the startup phase, total accounts payable is greater than total accounts receivable – which indicates a cash flow problem. Startups will often use a line of credit or a loan to help smooth the cash flow issues. But, other than borrowing money, what else can you do?
Here are a few ways to manage your cash flow and avoid putting your business in danger.
Write it down.
Projecting your cash flow can help identify existing problems much more effectively than making assumptions in your head and hoping it will all work out. A cash flow projection will help you see where to adjust planned expenses if sales aren’t picking up as quickly, or if your receivables ageing is climbing (meaning your customers aren’t paying as quickly as they used to). Use this projection when making decisions that will affect cash. Adjust your projections on a regular basis, at least monthly.
When projecting your cash flow, avoid putting down pie-in-the-sky hopeful sales numbers and too-low costs. Base your assumptions on reality, such as past performance. When we make investments, we are constantly told, “Past performance is not indicative of future results”. However, the past is all we have – unless you have some super-human ability to see into the future. I don’t. So, using some critical thinking around last year’s performance, it’s a great basis to begin a projection. Then, armed with this year’s assumptions around market, product, or policy changes, layer in your adjustments. What if your business is so new that you don’t have a year of performance to form a basis? In this case, you should find an existing product or service that’s similar enough to yours and create your projection based on that.
Cash is king.
Beware of huge capital outlays too soon in your startup phase. Fixed assets are expensive and you need cash to pay the bills. And the inevitable unexpected costs will arise, whether from personnel issues, an equipment failure, an unhappy customer, or just being blind to the total cost involved. It makes sense to save cash by leasing or renting instead of buying. At least buy used instead of new. Limit in-stock inventory and find options for fast delivery if more inventory is needed. Hang onto that cash.
Acknowledge bad terms during startup.
From the sales side, it can be hard to keep your receivables current. Getting late payments from customers is a huge challenge. From the expense side, your landlord may ask for the first and last month’s rent along with a security deposit. You may need to put cash in escrow for certain costs, such as utilities. Your vendors may want immediate payment terms until you can establish good credit with them. These things put added pressure on your cash flow. Instead of feeling bad for doing collection calls when you’re just so happy to have made a sale, you must find friendly ways to connect with your customers while reminding them they missed their payment. Use a lockbox bank service to speed up getting receivables into your bank account. At first, you naturally want any and all customers. You’re just happy to be recording revenue. Eventually, you’ll be better off establishing a policy for collecting receivables (e.g. 1 ½% finance charge or work stoppage after 30 days past due) and keeping only your good customers. Offer discounts before you write off bad debt. Of course, you can sell your bad debt, but it’ll be for pennies on the dollar. Instead of wasting time chasing bad debt, focus on your good customers. And certainly don’t pay your bills before they’re due.
Even if your business is not in its startup phase, these are just a few ways you can manage your cash flow and reduce your exposure to any cash-flow surprises.