Most small business owners only focus on cash flow when they’re in trouble, and can’t make payroll or pay an important bill. If the sudden coronavirus pandemic and ensuing economic crises taught us anything, it’s how crucial small business cash flow management is to a business’s survival. Even companies as large as the Denny’s restaurant chain had to scramble hard to funnel cash into the company, selling stock to raise some money.
Of course, that’s not likely an option for you. Small business cash flow management primarily focuses on three things: your business’s cash flow statement, controlling your receivables and payables, and having access to a business line of credit.
Cash Flow Statement
Cash flow is the money moving in and out of your business. A cash flow statement shows where the money came from and where it went at any specified period. Along with your balance sheet and income statement, the cash flow statement is an integral part of your company’s financial reports.
Money paid to your business for services rendered or purchased products typically generates most of the cash flowing into your business. Cash can also come from the sale of other companies or equipment, dividend distributions from investments, business loans, or business lines of credit. Products and services invoiced for but not paid yet, are the business’s accounts receivables and not considered cash flow until the invoices are paid.
Cash moves out of your business when you pay for business expenses, such as utilities, office rent, payroll, and loan payments. Accounts payables are the bills you have received but have not paid yet.
Small business cash flow management means keeping a close eye on your c
ash flow statement. A cash flow statement details where the business’s income comes from and where it goes on a daily, weekly, monthly, and annual basis and has three sections:
- Operating Activities (money earned from the business/spent on the business)
- Investing Activities (money earned from investments/spent on assets and equipment)
- Financing Activities (money distributed to owners and stockholders/funds received from and repaid to financing sources.
Your cash flow statement is a real-time gauge of your small business cash flow management and, for that reason alone, needs to be kept current and studied regularly. The cash flow statement tells you:
- How attractive your business is to lenders or investors. Investors like businesses to show strong small business cash flow management since that confirms they’ll receive dividends. Lenders want to see that you have repaid loans.
- If you have an excess of cash. Having too much cash on hand sounds like a dream come true. But that money can be better used to buy equipment, upgrade technology, hire new staff, launch new marketing campaigns, or complete other business improvements. Or it can be in a long-term savings account, earning interest to increase your cash reserves.
- If customers are taking too long to pay. Many cash flow problems are due to slow-paying customers.
- Where the majority of the money is earned. In a healthy, sustainable business, most of the company’s income should come from product sales or services rendered.
Your cash flow statement gives you essential insights into your small business cash flow management, in other words, how well the company generates cash to pay its debt obligations and fund its operating expenses. Review the cash flow statement to adjust, predict, and get ahead of any potential cash flow challenges small businesses face before they happen.
Small Business Cash Flow Management Receivables and Payables
Just because you’ve billed a client doesn’t mean the cash is in your bank account. Equally, having cash in your account doesn’t mean all the company’s bills have been paid. In the most basic terms, part of solving cash flow issues is to lower your expenses and get customers to pay faster.
Some expenses like buying inventory are necessary, but if small business cash flow management is an issue, perhaps your inventory management or supply-chain management needs an overhaul. Also, examine your monthly expenses to see where you can cut back or eliminate some costs. Are you paying for subscriptions or memberships you no longer use? Can the business survive as a virtual company permanently? Fewer workers in the office could be a win-win: employees like the flexibility of working from home and your business saves on overhead costs.
Getting customers to pay faster is the eternal quest for small business owners. The following are a few easy tips to implement.
- Clean up your invoice. Don’t clutter your invoice with a lot of unnecessary design elements or lengthy explanations. Use a simple design with the details of accepted forms of payment, how to contact you, and the due date.
- No surprises. Nothing on an invoice should surprise a customer. Invoices with unfamiliar language or confusing items listed get put on the proverbial bottom of the pile to deal with later. Use terms, descriptions, and fees you’ve already discussed.
- Know who to invoice. Accountant turnover happens, so always make sure you know which address or email the invoice goes to and what information the customer wants on the invoice such as PO#s or Federal Tax ID numbers.
- Offer a discount for early payment. Clients love discounts on their invoices, so offer an incentive quick payment. Other options include asking customers to pay in installments or pay half the charge upfront.
- Invoice immediately. A delay in sending invoices could signal your customers that money isn’t really that important to your business, and you’re in no hurry to get paid. Take smart small business cash flow management actions and invoice as soon as a project is completed.
Business line of credit
Every company should have a small business cash flow management backup plan, just in case. Let’s say payday is coming up, but a big client hasn’t yet paid their invoice. Or, what if a great deal of new equipment suddenly appears, but you don’t have the cash to buy it? Charging a large amount on a credit card is unwise due to the high interest.
You could apply for a business loan. But a business loan from a bank is installment credit. Once the loan application is approved, the business receives the entire loan and needs to start making monthly payments immediately. Once the loan is paid off, the account is closed, and if the business needs more money down the road, you must start the process all over again.
Small business payroll loans are a good option if you need payroll funding immediately to meet your payroll deadline. If you have other concerns, a business line of credit could be the solution to your small business cash flow management problems. Unlike a bank loan, a business line of credit is revolving credit—it allows you to draw money when you need it and then pay it back over time.
There are two types of lines of credit: unsecured and secured. In most cases, commercial banks will only offer your business a secured credit line, which means you have to come up with collateral (business and/or personal assets) to back up the credit line. Collateral might also be your business assets such as inventory, receivables, and equipment. A lender might even ask you to use your home as collateral.
Unsecured lines of credit, like the kind Financing Solutions offers, do not require collateral and are easier and faster to obtain. Where a bank line of credit could take between three and six months to get in place, Financing Solutions could have your money to you within a week, solving your small business cash flow management issues. And in some cases, unsecured lines of credit from Financing Solutions are cheaper than a bank line of credit.
The best time to get a line of credit is before you become a business struggling with cash flow. Apply for a business line of credit now so that you have a ready solution for any cash flow challenges.