Best Practices in Cash Flow Management for Small Businesses

cash flow management

Best Practices in Cash Flow Management for Small Businesses

960 640 Martin Jablonski

Cash flow management is the key to winning for small businesses. Cash is the king for small businesses. It is their oxygen towards survival and winning against the tough competition around.

This post will help explain some of the best practices to ensure proper cash flow management for your small business.

Offer discounts for pre-payments to boost cash flow management

Giving incentives like discounts for early payments is useful in ensuring that you have the good cash flow from your business operations. Many people also like getting payments out of the way and getting a discount for doing that is just icing on the cake.

A little discount like 3% is not much, but for a big prepayment, it is a decent amount of savings for your customer. On your side, you get the cash early, and you can put them into work immediately. The other benefit is that you will not need to keep asking for delayed payments from your customers. It is too much of a hassle to go hunting customers with delayed payments.

Always remember that profit is not cash

Good cash flow management means understanding that profit equals revenue minus expenses. You might have booked ‘revenue’ from a customer, but if they pay only after 90 days, then your cash inflow will only happen after the 90 days. How about the days before the 90 days are up? Where will you get your cash?

As such, it is important not to have such a lengthy payment schedule for customers. In fact, it is better to have a down payment early so that you have some cash to work around until the rest of the transaction gets covered after completion of the deal.

The biggest reason why small businesses fail is not that they are not profitable, but is because they have poor cash flow. They are unable to meet their daily expenses to ensure the business survives and thrives.

For good cash flow management, take a good look at your expenses

Be mindful of all your cash outflows. What are these expenses?

Are there some expenses you can get rid of? Perhaps you can switch to another lesser expensive supplier or service provider. There might be some expenses that you have that are not giving a good return for you.

So make sure all your expenses are good expenses. These are expenses that are necessary and hopefully will bring in revenue for you.

Focus on controlling your expenses during the growth phase, so that as sales increase, expenses also increase at a slower rate.

Get creative and see which expenses you can do away with! This is part of solid cash flow management.

Make sure your business is liquid

How do you know your business is liquid? This means that it has cash in the bank ready to pay for emergency expenses or unseen expenses.

As such, make sure you devote a portion of your revenues to your liquidity fund, i.e. cash in the bank.

This protects your business from unnecessary borrowing from bank or dipping into personal savings to cover the expense.

Being liquid is also important for unseen catastrophes that could happen. Floods, sudden legal battle, etc. could happen. It is better to be ready when these things happen.

Being ready for any possible liability is sound cash flow management.

Create a subscription model to ensure good cash flow management

A subscription model is when the customer pays monthly or annually for the service or product you are offering.

If there’s a way you can introduce a subscription model to your business, that would be ideal because that will reduce invoicing requirements and run after late payments.

More importantly, you get a good infuse of cash that will allow you to plan out your expenses for the coming months.

You can also park some of it temporarily in high interest-yielding short term savings or deposits account. Check your local bank if they offer these kinds of short-term savings or investment program.

Be careful with taking on debt

One of the keys to successful cash flow management is to be wary of debt. Debt, when unmanaged is a big cash drainer because your cash goes into paying off the debt.

If you have no good reason to take on the debt, then don’t do it. Find other means to secure the financing you need for your business expense.

If you must take on debt, study it carefully so that you only borrow the necessary amount you need rather than taking a huge loan that will not produce any revenue streams for your business.

Be careful in hiring

Be careful on hiring

Good cash flow management means only hiring when it makes sense. This means hiring only if they will bring in more money than the expenses related to hiring the person.

A huge payroll can quickly drain your cash flow.

Let your growth fuel hiring, not the other way around.

If you need additional workforce, perhaps consider outsourcing to save money or to hire part-timers or volunteers if possible.

Boost your cash inflows

Part of a good cash flow management system is seeking ways to increase your cash income streams. This could mean raising prices as necessary especially if you have communicated the value of your product or service. Don’t strive to be the “low price leader” as it is a losing proposition.

Enforce your payment terms. Don’t wait for 45 or 60 days to get paid. Shorten it and put a due date on your invoices so that you get your cash sooner. Do this at the start of your business so that it becomes a standard and it is clear to your customers at the onset.

Strike while the iron is hot. Find those items that you are selling that are best-selling. Boost your efforts in selling more of those items to boost further you cash inflows. These cash reserves will ensure survivability of your business.

Manage your inventory

If you have inventory at hand, try to keep it at a minimum. There are costs related to inventory and if you store too much, your cash flows are easily drained. So look carefully into your inventory and see if there are things that you can reduce the frequency of ordering it.

Old inventory is risky because it may not be sold at full price anymore and old stock might turn off customers, especially if there are new models or designs already available.

You might be forced to sell the inventory at basement prices which will not help your profitability margins.

Assume for the worst and hope for the best

This is critical at the start of your business. Your concept is unproven, and you do not have loyal customers yet. So make sure you project realistic cash inflows at the start. Perhaps even forecast that you will have no sales the first three months.

This kind of mindset is necessary for good cash flow management and will push you to hustle and make sure you have cash inflows coming to sustain your business.

The idea is to avoid being overly optimistic about your venture. Yes, have a positive mindset in making it a success but regarding cash flow, lean on being more pessimistic and negative about it.

Use a weekly model to track your cash flows

The weekly basis is good because it will give you enough details to understand really how cash is flowing in and out of your business. Make sure you track the cash by source (inflow) and by use (outflow).

This will allow you to tweak your payment schemes better to ensure that you have smoother cash flows for your business.

Use a monthly format to forecast your cash flows

This gives you a big picture of your cash flows, and it will pinpoint some months wherein there is a sudden drop in cash. This will help you plan for those expenses, e.g. use a line of credit or find ways to boost cash inflows that month to cover those expenses.

Secure a line of credit

This one will serve as your emergency net. Apply early for a line of credit so that in times of great cash crunch, you can pay your employees and suppliers and everyone remains happy. Strained relations with employees and suppliers will drag down your business so make sure this line of credit is available anytime.

However, of course, your mindset should be to avoid using this at all cost. Use it only when you have exhausted all the other options available to you.

A line of credit usually has high-interest rate charges and has a quicker repayment schedule. As such, it could drain your cash flow.

Impose late payment fees

This gives your customers more incentives to pay on time because if you did not have late payment fees, you might never get paid.

As such, put in a significant late payment fee so that you do not suffer from late cash flows.

Check the industry standard as to what percentage is usually slapped with late payment fees.

Offer a variety of payment options

more payment options

Don’t limit your customers with their payment options. The more you have, the more chances they will have one that is most convenient for them. Instead of just cash payments, offer check payments as well as credit card payments.

There are also online payments like Paypal and other fintech paying apps. Mobile payment apps allow your customers to pay you quicker since internet connectivity is getting better and more and more people own smartphones.

The idea is to make it easy for them to pay.

Keep your customers

Acquiring new customers is more expensive than keeping your customers. Keeping loyal customers will help you establish a stable base of cash flow.

So do everything to delight your existing customers. Continue to innovate and build a stronger relationship with your customers.

Create loyalty programs that keep your customer base intact so that your cash flow from them remains consistent.

Focus on nurturing the relationship with them so that you have a life-long customer that will help you spread the word about your business as well as providing consistent cash flow for your business.

Get new customers

Your company should be continuously marketing, both online and offline. Use social media and content marketing to bring out valuable content to attract new customers.

Getting new customers will boost your cash inflows and help increase the liquidity of your business. This is part of sound cash flow management.

So just because you have a stable base of customers does not mean you should stop marketing. Look to scale a bit on your operations to grow further your income and cash.

You can use a freemium model to attract new customers, and hopefully, they convert into premium or paying customers.

Try Partnerships

You can establish complementary partnerships with other businesses to advertise together. They can advertise on your behalf, and you will help to advertise them.

As such, you save advertising expenses which can increase your cash flow.

Advertising can be very expensive so try to use guerilla marketing to improve your cash flow management.

Try Outsourcing

Instead of hiring someone full time complete with all the benefits, you can outsource some of your work at a much cheaper rate to freelancers since you do not have to pay other benefits aside from the fixed payment.

This will lessen your payroll expense account and boost your cash inflows.

You can visit sites like Upwork to get freelancers to do pretty much everything, from writing to web design, programming, and marketing.

Tap Investors

If your cash flow is positive, you can look for investors to boost your capital base and provide emergency funds.

Investors love companies with strong cash flows. So highlight this in your business pitch or when you network with potential investors.

Get some help

If you are not comfortable dealing with numbers and recording business transactions, find a bookkeeper or accountant who can help you on a part time basis. In fact, you can have them mentor you at the start so that eventually you can do it on your own and save some money in return.

Automate fixed expenses

You can enroll some bills payments online connected to your business account. You can then schedule the payments so that you never miss a fixed expense like your internet bill and thus you get slapped with late payment fees.

If you can automate activities in your business using technology instead of hiring someone to do it, then invest in that technology so that you lessen your payroll expenses and boost your cash inflows.

Be efficient in delivering your product or service

By optimizing your business processes to ensure speedy delivery of your product and service, you will be able to ask for payment quicker and potentially boost your cash inflows.

Consider selling unused assets

Look through the assets of your business and see which ones you can dispose of and get some cash in return. Proper utilization of assets is part of good cash flow management.

You might have some machines or furniture or electronics that you are not using.

So start decluttering and sell these assets to boost your cash flow.

You can hold a garage sale or sell them online.

Plus the more you hold unused assets with you, the faster their value deteriorates. So sell them as soon as you know you will not be using them.

Lease instead of buying

Instead of outright purchasing assets, one easy way to lessen your cash outflows is to lease them.

After all, leasing has the advantage of full service, meaning the lessor will be the one to fix any problems associated with the leased asset.

Plus, leasing will not burn a hole in your business pocket at one go. You get to pay the lease payments on an affordable monthly or weekly payment.

Finally, assets depreciate upon the first usage. So why suffer from that when you can just lease assets like photocopying machines and even vehicles.

So consider carefully if you want to buy assets wherein these things can become obsolete quickly due to technology. Leasing is safer because you can move to a better piece of equipment when your cash flow is better.

Focus on marketing activities that drive cash flow

Measure well your marketing activities. Which ones are driving engagement and conversion towards sales? If there are marketing tactics that you are spending on that does not bring in cash, stop doing those.

Do marketing activities that are cost-effective. Do guerrilla marketing to boost impact yet at free or low cost.

Sometimes, you have to choose your customers well

If it is possible to do a quick credit check on a potential customer, do it so that you know if they have the history of skipping paying bills.

By vetting your customers, you prevent major headaches down the road in collecting unpaid dues.

This is why asking for down payment is good because it gives a clear signal whether someone can pay for your product or service.

Remember you are a business, not a charity.

By being cash flow smart, you ensure your small business continues to survive and thrive.

Negotiate well with suppliers

If you develop good relationships with suppliers and pay them without fail, it is possible that you can negotiate better terms with them. You can ask for bigger discounts or longer payment period.

This can boost your cash flows as you have a longer time to raise the cash needed to pay for your expenses like raw materials.

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