Cash flow is the lifeblood of a business. It’s so important that 90% of small businesses who have closed their doors have cited poor cash flow as the main cause. If you don’t want to become a part of that statistic, here are 12 ways on how your business can avoid cash flow problems in the first place.
1. Create a Cash Flow Forecast
Gather your monthly expenses to create a cash flow forecast for your business – which could simply be on spreadsheet. Typically, this means predicting what your finances should be like during the next 6 to 12 months. If you’re monthly expenses come out to $2,000 per month, then you know that you at least need $24,000 over the next year to handle expenses. By doing so, you can better understand your financial situation and be prepared for unforeseen circumstances.
2. Profitability Doesn’t Always Equal Cash
Always keep in mind that just because your business is profitable doesn’t mean that it’s going to outlive a business that isn’t as profitable. Businesses of all sizes and stages can run into cash flow problems. You aren’t in the clear until after revenues are in your bank account and your expenses have been paid.
3. Become an Invoicing and Collections Pro
One of the main causes of cash flow problems is not staying on top of payments. Make invoicing a priority and send them out quickly. Don’t forget to have clear payment terms that state your preferred payment method and the date that you want to paid – the industry norm is 30 days.
If a client doesn’t pay the invoice on time, you’ll also have to become a master at collections. These clients aren’t just frustrating to deal with, they can also do some real harm to your cash flow. Don’t hesitate to follow-up and be persistent until the invoice has been paid.
4. Keep Books Organized will Help Avoid Cash Flow Problems
The last thing that a small business owner needs is another task. But, keeping your books organized is one of those essential tasks that needs to be frequently taken care of. While it’s incredibly easy to misplace bills, forget to send out an invoice, and not keep up with payroll, you can’t simply push bookkeeping duties aside.
If you can’t handle your company’s books, either outsource this task or hire a bookkeeper. If you’re just starting out, there are more than online tools and software that can make bookkeeping a breeze. For example, you can setup recurring payments with our company Due.
5. Hire Once You’ve Won Your Market
We saw this all the time. An exciting business grows rapidly and the company hires a ton of new people. Then the predictable happens. The business is forced to start laying people off because they can’t afford all of the new employees. As Dan Yoo, COO of NerdWallet, says on Entrepreneur, “Startups must stretch the capabilities of employees to the point of pain. That hurt then dictates where money should be prioritized with more hires.”
6. Be Friendly With Lenders
It’s not recommended for business owners to continually borrow money. But, there will be times when your business could use a little cash boost. That’s why you should stay on good terms with your previous lenders. Regardless if it’s a bank or investor, make sure that you don’t burn bridges with them and keep them updated on your business. If you build trust with them, they may be as hesitant to lend you some cash when needed.
7. Be Familiar With Seasonality
Seasonality can have a major impact on cash flow. For example, seasonal businesses may only be able to bring in cash or hire full-time only half of the year, so they’ll have to budget accordingly. Even if you’re business is open year round, seasons can still affect your ecash flow – think about inventory costs or heating/cooling bills.
8. Sync Credit Terms
What happens when your invoice doesn’t get paid until 30 days, but your expenses are due in 14? You’ll quickly run into a cash flow since you’ll be paying your expenses before any revenue is coming through the door.
That’s why you need to sync your credit terms. For example, speak to your vendors to see if they can push back the due date. Or, renegotiate payment terms with your clients so that you’ll get paid sooner.
9. Transparent Communication
Speaking of negotiating terms with vendors, or even working with financial institutions, we won’t be able to get too far if you don’t have an honest and open dialogue. Let’s say that you’re currently in a rough patch. Reaching out to vendors and lenders and explaining your current situation is the best course of action. Most of the time, vendors and lenders are actually accommodating and will work with until you straighten everything out.
10. Maximize Cash Flows
Of course, if you really want to avoid cash flow problems, you should looking for ways to bring in more cash in the first place. There are plenty of ways for you to accomplish this. For example, you could accept multiple payment methods like credit cards, require a 50% down payment, or consider using a subscription model so that you’ll get get a consistent monthly income.
Also, don’t forget to constantly be on the lookout for better clients. Why deal with a handful of clients who each pay you a couple of hundred dollars per month or a couple of high paying clients that each pay you thousands of dollars each month?
11. Eliminate Cash Suckers
What’s the main source that’s draining your bank account? Is it an unnecessary expense – a cleaning service or paid subscription for software? Do you have too many employees? Can you cut down energy costs? Do you need to purchase new equipment?
Identifying and eliminating these leaks are one of the best ways to increase your cash flow and prevent any future hiccups.
12. Plan For the Unexpected
Creating a cashflow forecast and understanding seasonality are just a couple of pieces in being prepared. You also need to stay on top of market conditions, monitor clients/vendors, and set aside a cash cushion in case of an emergency. The more prepared you are, the less stressful it’s going to be when the unexpected arrives.