Cash flow is the lifeblood of small businesses, but sometimes due to slow receivables or unforeseen circumstances, businesses find themselves in a cash crunch. Being short of cash can be frustrating, stressful and disappointing, but with a bit of adaptability and careful planning, you can use this cash crunch as a learning experience to strengthen your business's finances for the future.
First and foremost, let's get right down to it.... If your small business is out of cash flow, your small business is pretty much done for. Trying to run a business without managing cash flow is like trying to paddle a boat without an oar. Even if you succeed, it will be an upstream battle that you won't win. It's just a matter of time, before lights out. Cash flow is important for all businesses, but it is critical for businesses under 1 year in business. If you cannot manage your cash flow within the first year, you will likely not survive the second year.
The three key elements of your cash flow analysis include:
- Accounts receivable: What customers and clients owe you.
- Accounts payable: What you owe your suppliers.
- Shortfalls: You hope not to have these, but they do happen.
Here are a few tips to help you row your cash flow boat successfully:
1. Determine Your Break-Even Point - You should know when your business will become profitable, not because it will affect your cash flow, because it won’t, but because it gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination. Focus your efforts on managing your cash flow with an eye toward reaching that moment when you realize your first profits.
2. Focus on Cash Flow Management, Not Profits - This may sound contradictory to #1, but it’s not. Use your break even point as a benchmark. After you reach break even and your business is profitable, you still need to manage your cash flow, of course. You have reached another stage of your business’s life.
3. Maintain Some Cash Reserves - You will have cash shortfalls. Your business’s very survival may depend on how you maneuver through those shortfalls. If you start with some cash in your bank account, it will be easier to focus on cash flow and you won’t stress about the shortfalls.
In order to deal with this shortfall, a cash flow loan may be your best option. For this type of business financing, lenders provide you funds and use your future expected cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future by giving the lender the rights to a predetermined amount of these receivables. These are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role. As the name indicates, the lender is more concerned with inspecting your cash flow (usually bank statements) to approve your application. Turnaround time is another great feature of a cash flow loan, as funding usually takes place in a matter of days.
4. Collect Receivables ASAP - Keep net 30 and net 60 terms in contracts to a minimum. If necessary, delegate the task of keeping an eye on receivables and contacting customers periodically to collect payment to a trustworthy, persistent member of your team.
Need a Financing Solution to Collect Early on Accounts Receivables? Accounts receivable financing (A/R financing), sometimes known as a ledgered line of credit or invoice financing, is a great solution for businesses that need more funding that is not available from traditional lenders. Many businesses need additional cash flow to support seasonal demands, growth, business opportunities, or solve a short-term cash need. Accounts receivable financing provides your business with flexible and immediate cash that will give your business the opportunity to grow, restructure, take advantage of supplier discounts, hire additional employees, or even to fund payroll. With our accounts receivable financing options, you can access cash without having to give up equity in your company, and it is less restrictive and expensive than equity financing. A/R financing can increase or decrease based on your current businesses size and needs, allows you to gain administrative support to manage your receivables without additional staff, and gives you access to cash when you request it (based on your eligible accounts receivable).
This type of asset-based financing allows businesses to get instant access to working capital without jumping through the hoops or dealing with the lengthy waits associated with getting a bank loan. When a business leverages its accounts receivables to boost its cash flow, it also doesn't have to worry about repayment schedules, and instead of focusing on trying to collect bills, it can focus attention on other core aspects of its business.
5. Leverage Data - Leveraging data isn't just for social media sites, sports teams, and wearable fitness devices. If your business is growing, you're probably using data to track customers, identify market opportunities, and monitor market share. But are you using data to analyze your finances? Many small businesses aren't. Although the data is available in your accounting software or financial system, few companies take the time to access it and study the numbers. You may think cash flow is only about how much is coming in and how much is going out. But if you dig deeper into your own business data, you can create more accurate forecasts, identify upcoming cash gaps, and help spot opportunities and threats long before they appear.
6. Extend Payables as Long as Possible - In contrast, get the best deal you can on payables. Extend your payables to net 60 or net 90, if you can. Some suppliers charge late fees, however, so make sure you pay on time.
7. Prioritize Cash Flow Analysis - The more rigorous you are about tracking cash flow, the more empowered you'll be to track dips and spikes in performance. Look for bottlenecks and challenges, problems that should be alleviated sooner rather than later. Cash flow optimization is an initiative that is equal parts logistical and strategic. In addition to making sure that numbers are tracked, focus on how you can make them better.
Managing cash flow is vital for the health of any business, and you should look for ways to improve your cash flow while also protecting relationships with your vendors and customers. Creating a smart cash flow forecast can help maximize growth for your business, by spotting trouble before it arrives and making sure you always have enough money on hand to keep your business growing.
Small business owners can encounter obstacles when seeking funding from mainstream banks; however, at LVRG, we know one size doesn't fit all in the world of small business financing. LVRG takes a pragmatic approach to small business financing. We understand not all businesses operate similarly, and their finances reflect these differences. Most tech websites nowadays promote cookie cutter, one size fits all business loans. A generic approach to financing isn't the right approach for the unique financial needs of small business owners. It requires innovative solutions to keep the financial side of your small business running smoothly, the type of specialized support you receive from LVRG Funding. At LVRG, we offer extensive solutions and targeted solutions to help small to mid size business owners optimize their cash flow and effectively manage their revenue cycle. Have questions about small business cash flow? Chances are, we've got answers. Here to help!