Let's face it... cash is king! Without the necessary cash on hand, everything tends to become a bit more difficult. Tasks that were once everyday and mundane become a dull nagging pain to yourself and your business. You start to worry about how you're going to pay your employee's salaries, keep your vendors at bay, and buy additional supplies. The notion of actually investing into the future growth of your business has become a "someday" priority and you've got more pressing issues! Chances are, if you're a small business owner, you've experienced these issues from time to time. But alas, every business owner who's experienced these issues has also experienced the alternative; the times where new clients seemingly come out of the woodwork, you align your dreams with an investor, you discover a way to save 30% on material costs, business is booming!
Both the rough seas and the blue skies are a reality for most business owners, sometimes in the same month or week! Having a big safety net or credit line, or perhaps a great relationship with your local bank are two common ways to help manage the cash flow of your business. However, for many small business owners those options are simply not a reality.
Here's 5 tips to help you more easily manage your business' in and out cash flow on a daily basis.
Forecast Growth Based On Prior Experience
The key to managing your business cash flow is understanding how things stand now, and where they’re likely to go. Many businesses experience revenue cycles that are cyclical in nature. Some times of the year are booming, others not so much. Maybe your landscaping business experiences a drop throughout the winter season. Maybe your largest client takes his annual vacation every December, leaving his business unattended. Maybe your sporting goods store experiences a boom as people gear up for outdoor activities during the spring.
Take a look at your business' month-to-month performance over the last few years and aim to identify predictive indicators that may help you understand the when's and why's of strong or weak moments throughout your business' history. The key is to always be proactive, and never reactive!
Pay Your Bills On Time, But Never Early
Really? Yes, really. While it can often bring you a feeling of relief when paying your bills early, you may regret it if you ever encounter an unexpected expense and need that cherished money back! Nothing is guaranteed in life, especially among the brave who chose to venture into the wild world of entrepreneurship. It’s recommended to wait until your bill is due before paying, and the easiest way to accomplish this is to schedule electronic bill pay for your monthly bills. I'd also encourage you to "go paperless" - save some trees and just put your monthly recurring bills on something as simple as a sticky note or advanced as a Gmail calendar as a recurring entry to remind you when everything is due.
Keep Personal Expenses Separate From Business Expenses
Dependent upon the nature of your business and it's structure, this may seem like a no brainer. However, for many sole proprietors or freelancers, you may just be utilizing the same account for both personal and business purposes. While consolidation is often a way to make your life easier, I promise you that's not the case when allocating expenses between your personal and business life. It's time to make the split! It’s truly the only way you can get an accurate view of your business’ financial standing. Additionally, it makes matters much simpler come tax time to accurately determine which of those expenses are personal and which are business. Separate your respective accounts, sync your online banking with an accounting software like QuickBooks or FreshBooks, then never look back.
Stay On Top Of Your Invoicing
This applies to both sides. Many business owners have that list in their head; the list of clients who they know will slow pay their invoices. It's been proven in the past, and you just know that Joe's Plumbing will pay their invoice 10 days late every time and just have to deal with it, or else get angry and risk jeopardizing your relationship with that client. But the unexpected culprit to many business owners is when they forget to issue the invoice to their client in the first place. You get so caught up in the work, the grind, meeting those final deadlines, and engaging in revenue producing activities, that you completely forget to collect that much needed revenue! Bottom line - if you don't invoice, you don't get paid.
Create a formal schedule to make sure you invoice as soon as a project is complete. Set aside time each week to review your invoices, make sure nothing has slipped through the cracks, and follow up on any past-due invoices. Additionally, you can offer your clients incentives if they pay the invoice early or the same day!
Consider "Healthy" Lending Solutions
Everyone knows that borrowing money or incurring additional debt will ultimately cost you more in the long run, as opposed to just paying out of pocket. But that doesn't mean debt has to be a bad thing. Obtaining the right source of financing could mean the difference of surviving and thriving for your business! The key rule of thumb here is to always keep ROI in mind. Over the course of your lending term, can you effectively use that capital to make a greater return than the cost of your loan? Most of the time, the answer is yes!
Take into consideration a restaurant owner who borrows $20,000 over a 6-month term and uses the capital to invest into a Facebook marketing campaign which yields them 5,000 new paying customers and $100,000 in sales over the course of their 6-month term. They've grown by leaps and bounds! This is especially true when considering the long-term residual effect of those recurring customers. Even if the "cost" of that loan was $6,000, their total positive return would be $74,000 not including repeat business.
Another example is a construction company who just won a job bid with a very large commercial client. The job will earn their company $1.5 million, their largest to date! The only problem is the material costs alone to perform the job are $200,000 and their clients invoice isn't due in full or anytime soon. They have to wait out a Net-90 term. Catch-22 scenario - they can't start the job without the necessary capital, and they can't obtain the capital unless they start on the work. In this scenario, finding a reputable lender or invoice factor can help them overcome this obstacle and get them back to business!
What tips do you have to better manage your business cash flow?