According to a recent American Express Open survey, cash flow is a worry for nearly half of U.S. small business owners, and it’s easy to understand why.
If you’re not taking in money faster and in greater quantities than you’re paying it out, your company’s very existence could be at stake. About 90 percent of small business failures can be traced back to cash flow issues, Dun & Bradstreet reports.
Plus, without healthy cash flow, your small business will have a harder time investing in new equipment, additional locations and other growth opportunities.
Here are a handful of ways your business can increase its cash flow and avoid potentially fatal shortfalls.
PREDICT THE FUTURE One of the best tools for preventing cash flow emergencies is a cash flow projection. By putting together a projection, you can forecast how your expected cash will stack up against your expenses in the coming months. You can see if you’re going to run short of cash three months from now—giving you time to line up credit, cut expenses or find some other solution. (SCORE actually has a free template for cash flow projections that you can download at bit.ly/1yVGesu.)
Err on the side of pessimism when building your projections. Sometimes the money doesn’t come in like it usually does. Or a critical piece of equipment will break down when you least expect it.
TRACK YOUR TURNAROUND TIMES How long does it take clients to pay their bills? How long does it take you to move inventory? Unsold inventory and unpaid receivables tie up cash that you could otherwise put to work. If you see a sharp uptick in either number, it’s a warning sign that you might be facing a cash crunch soon.
INVOICE AS SOON AS POSSIBLE The sooner you bill your customers, the sooner they can pay you. Some businesses like to mail their
invoices in weekly or even monthly batches, but consider sending yours out as soon as you’ve delivered the product or service to the client. Depending on your industry, you could even ask for payment, full or partial, up front.
Bill quick, but pay slow If you have a bill that’s due on the 30th, don’t pay it on the 15th. Hold on to your cash as long as possible.
Be willing to make a deal, and be willing to ask for one There is, of course, an exception to the guideline above. Will your biggest vendor knock 1 to 2 percent off your bill if you pay within 10 days? Ask. And if you’re in a tight spot, consider offering a similar discount to speed up payment from your clients.
DON’T BE SHY ABOUT COLLECTIONS If a receivable goes overdue, you need to set up your accounting system so that you find out as soon as that happens. Then reach out ASAP via a polite letter, email or phone call. Maybe your customers were busy and just needed a reminder. And if they purposely dragging their feet, they now know that you are paying attention to their account.
TALK WITH YOUR BANKER Your lender might be able to help you set up a line of credit to cover temporary, unexpected shortfalls. One word of advice: It’s wise to have a conversation about credit before you need it.
Many institutions also offer other services that can speed up your receivables. A lockbox account, for example, allows your customers to send their payments to a bank-operated post office box, so those checks can be deposited more quickly. Or ask about remote deposit capture (RDC), which lets customers scan in checks via an office computer or a smartphone, then transmit them to the bank.
