Businesses big and small use a variety of cash flow strategies, such as getting advances on invoices, requiring advance deposits, and more. Going the more traditional route and applying for a bank loan may seem smarter, especially today with many of the big banks increasing their small business outreach and lending options.
However, if your small business were to find itself in a sudden cash crunch, a bank’s extended loan approval process could leave you unable to pay creditors and employees or buy needed inventory. Small business owners need to think creatively to keep their cash flowing.
#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. Deposits and Partial Payments - Before starting any work, asking for a hefty down on large orders is a smart way to make sure you’ll get paid. Requiring a “security” deposit creates a safety net for your business, protecting it from rollercoaster economies around the world. Make sure you spell out the details of any upfront payment requirements in your contracts.
#3. Cash on Delivery - Requiring COD payments works particularly well when you’re working with new clients—at least until they establish a history of on-time payments.
#4. Payment Plans - If a customer won’t put down a deposit or pay early, consider setting up some type of payment plan so some money comes in on a regular basis. Negotiate monthly payments or payments at each stage of the project or relationship.
#5. Understand Your Operating Cycle - Regardless of size, every small business must deposit, monitor, and manage cash receipts; make payments; fund purchases; and invest in the company. Reviewing and understanding each step in this cash-flow cycle can help a company work more efficiently.
#6. Layaway Plans - In the case of a highly anticipated or limited release product, consider establishing a layaway plan or offer customers a pre-sale discount. Customers are often willing to pay a premium for items they can’t get elsewhere.
#7. Leasing Equipment - You can save a lot of money by leasing equipment instead of purchasing it. Usually, lease agreements include a service contract, and you can take advantage of lower-cost upgrades when new technology is released.
#8. Review Your Payroll Process - If you pay your employees twice a month instead of every other week, you will be managing 24 payroll periods instead of 26 during the course of a year, making your company more efficient.
#9. Sell, Sell, Sell - If you own equipment that’s outdated or obsolete, put it up for sale or auction. The same holds true for older inventory: Sell it for a discount to get a quick cash injection to your working capital.
#10. Obtain Capital - Capital is so important to growing a business. If you don’t have what you need for your business’s development, all you’re doing is paying your bills and just getting by. Having enough working capital to pay those bills on time every month is important, but to take your business further, it’s growth capital you should be paying close attention to. To do that, you have to understand how growth capital works, what it does, and how it helps your company develop from a small business to something much larger and stronger.
#11. Focus on Cash Flow Management, not Profits - This may sound contradictory to the last one, but it’s not. Use your breakeven point as a benchmark. After you reach breakeven 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.
Cash shortfalls happen. The month you need to pay out for a ton of new inventory could be a naturally slow month for revenue; the need for major repair work could fall in the same month half of your employees worked overtime. Whether they are due to a slow season, lagging client payments or unanticipated expenses, cash shortfalls are survivable if small businesses look ahead and act early. As always, we’re here to help! LVRGFunding.com