“Never take your eyes off the cash flow because it’s the life blood of business.” – Sir Richard Branson
Whether you’re an entrepreneur or business owner — that may be the best advice you’ll ever come across. In fact, an astounding 82 percent of business fail because of cash flow problems.
Where is your cash flowing?
I know what you’re thinking. You’re business is crushing it right now. In fact, it’s both profitable and growing. But, as Tim Berry explains in an article for Entrepreneur, profits aren’t cash. They’re actually accounting. Berry adds, “And accounting is a lot more creative than you think.
You can’t pay bills with profits. Actually profits can lull you to sleep. If you pay your bills and your customers don’t — it’s suddenly business hell. You can make profits without making any money.”
The same cash flow goes for growth.
Berry says that one of the toughest years he experienced as a business owner was when he doubled sales and still almost went broke.
“We were building things two months in advance and getting the money from sales six months late,” explains Berry. “Add growth to that and it can be like a Trojan horse, hiding a problem inside a solution.”
So, how do you know if you have a cash flow problem?
There are several factors, but the easiest way to identify this problem is realizing that your expenses exceed the cash coming into your business.
If this is the case, there’s no need to panic. Just take a deep breath and use these five cash flow tips to survive.
1. Create and stick to a budget.
If you haven’t done so yet, you absolutely need to sit down and create a budget for your business. This way you have a better idea on how much money is coming into your business and how much you’re spending. Knowing this information will help you change your spending habits.
Estimate your expected cash coming in.
Start by estimating your expected cash inflows and outflows by looking at factors, such as your sales cycle, terms and discounts provided to customers, and industry delinquency rates.
You also need to estimate your expenses and other cash outlays. This includes your day-to-day expenses, purchasing equipment and tools, marketing, taxes, and paying contractors and/or employees.
Don’t overwhelm yourself. If “budget” is a filthy, nasty word to you — use a different word. How about — “a spending plan?”
Your budget should be simple and not overly complicated. In fact, if you use accounting software like QuickBooks you can use last year’s data to generate a budget.
However, if you’re still lost, here are a couple of budget templates to try out:
- Annual business budget in Google Sheets.
- Business expense budget from Microsoft Office.
- Capterra’s free small business budget template
- Seth David’s small business budget template
I know that this was a lot to take-in, but you’re not done just yet. You need to keep tabs on your budget and make the appropriate adjustment. For example, if there were an unexpected rise in costs, then you’ll have to make some cuts from somewhere else. If not, you’re budget will get out-of-whack.
2. Offer a variety of payment options.
One of the easiest way to improve your cash flow is by expanding your payment options. This may sound obvious. But if your business only accepts cash, then you’re missing on a large potential customer pool. Remember, plastic is the preferred payment method for customers.
Offer other ways for people to pay you.
Start offering a wide-range of payment options, such as credit and debit cards and automated clearing house (ACH) payments. Don’t rule out digital wallet and mobile payment options either. These include PayPal, Square, Venmo, Apple Pay, and even cryptocurrencies like Bitcoin if you’re feeling adventurous.
The easier you make it for your customers to pay you for your goods or services, the faster you’ll get cash pumping back into your business.
3. Have a good rapport with lenders.
Don’t wait until you run into a financial crisis to turn to lenders. Banks and investors aren’t likely going to lend you money when you’re in financial trouble.
Does your bank recognize your face?
Instead, make sure that you have built a good reputation with these lenders in advance. While it’s still not a guarantee that they’ll help you out financially, you’re definitely improving your chances. This means having a decent history of paying back loans in timely manner
Additionally, lenders will make secured loans on assets like:
If you have equipment that’s in good shape, you may be able to secure a fixed-term loan for a single shot of cash during an emergency.
Because inventory can be sold and turned into cash, lenders are fans of this type of asset. Usually, the ratio of loan to inventory is 50 percent.
- Accounts receivable.
As defined by the Accounting Coach, “is the money that a company has a right to receive because it had provided customers with goods and/or services.” This is a revolving line based upon a percentage (usually 60 percent to 80 percent) of total accounts receivable (AR). The loan is due within a 60 to 90 day period.
- Corporate loans.
This is the most popular option in terms of corporate loans. Another option is to sell your accounts receivable through a third party instead of borrowing on them. This is called invoice factoring. It can be expensive, but it can give you a quick surplus of cash.
4. Match your receivables to payables.
This an overlooked, but quick and easy way to improve your cash flow.
Let’s say that you have to pay your suppliers every 30 days, but you’re getting paid every 60 days. There’s now a gap in cash flow.
Who will extent your due dates?
One way to correct this is by either by contacting your suppliers and asking if they’ll extend the due date or shortening the time that your customers have to pay you. If you have a good relationship with you suppliers, they may be willing to work with you since they don’t want to lose your business.
If neither of these options work, offer you customers incentives for paying earlier, such as 10 percent of their final pay if paid in full in 15 days.
5. Maximize cash inflows and minimize cash outflows.
Finally, look for ways to increase your cash flow, while also reducing costs.
How to increase cash flow.
When it comes to increasing your cash flow, you could require a 50 percent deposit on large or custom orders. You could also start offering a subscription service, institute a layaway program, discount inventory that’s not moving, or offering complementary products/services.
As for ways to cut spending, purchase used equipment instead of new, delay product upgrades, and repair your equipment instead of replacing it. You could also start bartering with your suppliers. If you new to this, Money Crashers has some excellent advice to get you own your way.