Now that your business is starting to grow, what’s the most important metric to follow? Profits? Revenues? Accounts receivable? Nope. The answer is cash flow.
If you aren’t monitoring your cash, you could be almost out of business and not even know it. Negative cash flow is a major issue – even though your business might be headed for the highway to success, it could very well crash on the entrance ramp.
When it comes to small business cash flow, there are three areas of importance during a business growth period: preparation, operation, and innovation. Here are a few suggestions for each of these areas in your business that can affect cash flow management:
- Expect expenses to rise before profits begin to appear. If you’re investing in new equipment, hiring another employee, or introducing a new product or service, you’ll have to shell out money before the added value impacts your bottom line.
- Watch for hints of a cash crunch. If you notice that you’re spending more money than what is getting put into your bank account, then something isn’t right. Take stock of your business to find out where the bottlenecks are.
- Apply for a line of credit early. As soon as you win a big contract, take your signed contract to the bank and open as large of a line of credit as you can get. The first payment is usually the one you’ll wait for the longest. It will come in handy when you need to cover your costs to get work started before your initial payment comes in. Banks will often lend 10% of your gross revenue as a line of credit. You may also be able to get a working capital loan against your accounts receivable balance or 50% of the value of your inventory.
- Structure your payment terms. On your invoices give clients a small discount if they choose to pay you early (say, net 10 instead, never for Net 30, they are supposed to pay you in 30 days). Also impose a penalty for delays in payments (say, 10% for 30 days overdue).
- Get serious about collections. For accounts receivable that are 31 days or more overdue without notification, you’re probably better off reaching out about your payment. Never be rude, but need a name in account payable so that you can get a status update. If you are getting the run around a collection agency might get you better results, but realize that you could lose a client going this route.
- Consider factoring. If you are really in a cash crunch, factoring could be an option. They os when you sign over your invoice(s) to a third party. They will advance you 75% to 90% of the amount due, minus the factoring fee, of course. This is a really expensive option, so consider this as a last resort.
- Try a flash sale: For non-retail businesses, it can be difficult to stimulate short-term flash sale, but you could create an online coaching program or pay per view webinar series. Create incentives that by offering discounts for new customers or on higher-priced services for current customers – demand payment by a specific deadline to secure the deal.
- Explore annual or subscription sales. If your business provides one-off services, look into whether annual contracts make sense. For retailers, consider mailing a box of your products to customers regularly for a flat monthly fee.
- Open interest-bearing accounts. When you do get a little extra cash, deposit it into an interest-bearing bank account rather than your standard checking or savings accounts. Let your money make money for you until you need to use it.