Every small business strives to maintain a positive cash flow to cater to business needs and have enough to commit to a new project. Unfortunately, many founders struggle to achieve positive cash flow. A study on small businesses found that 82% fail due to poor cash flow management.
Cash flow management is the everyday process of tracking your finances, including how much is coming in and the expenses, to predict how much is available for your business needs. It requires a thorough cash flow analysis to determine whether your business falls under the positive or negative. In a word, this process allows you to take the necessary steps to support business growth.
Cash Flow Management Strategies for Small Business Owners
- Identify your break-even point
As a business owner, knowing when your business will achieve profitability allows you to create clear targets and forecast cash flow requirements. Perform a break-even analysis using either the dollar-based or units method. Doing so will clearly show expected gains at various sales levels.
- Have cash reserves
Cash shortfalls are expected, particularly for start-ups. And business continuity will rely on how you survive these shortfalls. A good practice would be to ensure you have cash reserves to keep your business running for at least six months. This period allows you to maneuver through a market downturn or switch to different suppliers with more affordable prices.
- Monitor cash flows through worksheets
We can’t emphasize enough the importance of an accurate cash flow worksheet. Not only does it ensure compliance, but it also helps you gauge liquidity. A few best practices include having a worksheet all year round, recording your cash flows in good time, using the correct reporting currency, and automating the process whenever possible.
- Collect receivables beforehand
Ensure clients make timely payments by delegating a team member who follows up on any unpaid receivables. Using clear language on your invoice, such as “due upon receipt” rather than “net-30,” would be best. Additionally, it helps to maintain credit requirements to create a standard that will ensure only customers who meet this set standard receive credit. And if your business cash flow allows it, consider discounts for customers who make early payments. Lastly, consider offering your clients different payment options to make it easy for them to pay up on time to maintain positive cash flow.
- Negotiate for the best payables deadlines
Unlike receivables, your business could benefit from extended payables. Strive to get the best payables deadlines, such as net-90, to improve your cash balance. Like customers, you should make timely payments to prevent late fee charges or debt, the opposite of positive business cash flow. This scenario shows why it’s wise to have cash reserves.
As a business owner, you risk ruining your relationship with your best suppliers if you fail to meet payment deadlines, with some going as far as withholding future shipments, which can halt your business operations.
