One of the most pervasive problems that face small business owners, particularly in the initial and growth stage of their enterprise, is maintaining sufficient cash flow. Many businesses with great potential have suffered an untimely demise due to their inability to pay their suppliers, employees and revenue agencies (it is crucial to pay government obligations on a timely basis otherwise Revenue Canada and Revenue Quebec have a significant amount of power and can potentially freeze your bank accounts). Often these issues can be prevented through a greater awareness of your small business’ cash flow requirements along with a proactive mindset. This list focuses on ten different ways you can manage this process to reduce the number of potential crises that arise:
1. Keep your Accounting Up to Date: It cannot be stressed enough (admittedly I have a bit of a bias on the matter) that In order to really understand your current cash flow position, your accounting needs to be as current as possible. Many small business owners in the early stages might be able to take care of their own accounting and in the current environment there are an unprecedented number of cloud based accounting software and add-ons that greatly simplify the process. Alternatively, there are a plethora of firms that will handle the whole process for you at a lower cost than hiring a full time bookkeeper.
2. Manage your Receivables: Customers, many of whom are experiencing their own cash flow issues, will try and defer payment for as long as they can. It is important to clarify your payment terms and follow up with delinquents as regularly as possible. Further to point 1, keeping invoice payments up to date will allow you to generate an accounts receivable listing that greatly facilitates the follow up process.
3. Offer Discounts and Expand Payment Options: Incentives for early payment can be a powerful way to reduce the collection time for your accounts receivable. Similarly, allowing customers different payment options including e-transfers and credit cards makes it more likely that they will pay on time. The good news is that there are numerous payment processors that allow small businesses to accept direct and credit card payments. Keep in mind that there are fees associated with all of these options so it is a good idea to research your alternatives.
4. Manage Inventory: While it is important for businesses to be able to meet their customer demands quickly, there can be a significant cost to having too much inventory on hand. In addition to it restricting cash flow, there are storage and maintenance costs as well as the possibility that it may lose value as new models replace old ones. It is important that you regularly assess your inventory on hand with a view to optimizing it. There are software to help you with that decision and if your inventory is complex, it may be worth investing in a system that allows you to scan and track your inventory in real time.
5. Take advantage of Supplier Discounts: Vendors, likewise, are usually eager to collect on their receivables as soon as possible. To this end, many of them offer discounts for early payment which should be taken advantage of to the extent that your cash flow permits. When cash flow is restricted, you can often extend payment terms with vendors, although they will sometimes charge additional fees.
6. Review existing contracts: Monthly fees for phone or internet or graphic design services can continue for a long time without examination. Small business owners should take the time to review their recurring fee contracts, at least on an annual basis, and determine if negotiation is an option. Sometimes it can be as easy as speaking to a service provider about how to reduce costs. If costs seem unreasonable there are numerous competitors particularly if the service being offered is a commodity
7. Reduce Expenses: Perhaps the most obvious way for a small business to improve their cash flow and profitability is to cut costs. This, of course, is easier said than done. Should you stop providing free coffee to your employees to save a few dollars or does providing this perk result in additional productivity and goodwill (assuming that the coffee isn’t terrible). Should you cut your seemingly extremely expensive SEO expenses or will it result in lower sales due to a reduced internet presence? These are decisions that have to be evaluated carefully.
8. Reduce or defer owner salaries: While small business owners need to live, one of the simplest ways to free up cash flow in the short term is to reduce or forego your salary in the short term. Keep in mind that owners salaries are a basic and essential cost of the business so, depending on the tax consequences, it makes sense to accrue any salaries not paid in the short term to ensure the accuracy of your total expenses to run the business.
9. Set up a line of credit: your bank, who will claim to be your partner, can be a great resource (and also extremely frustrating at times) particularly if you are able to clearly demonstrate why you need credit usually through a business plan, good credit and solid financials. A new business might have trouble getting a line of credit immediately without a personal or other type of guarantee, however, with some guarantees this is still often possible. A line of credit is usually better than a loan as you are only paying interest on the amount that you need rather than the full amount of the loan although this can be offset by higher interest rates.
10. Prepare a monthly (or even weekly budget) : Estimating your revenues and expenses and the associated cash flow (you might sell $100k this month but only receive it in three months) is one of the primary tools to help small business owners clearly understand how much they need and how much they can spend. This can be set up as a spreadsheet (numerous templates are available online) or via budgeting software . Budgets don’t have to be overly sophisticated or even exact – they are really just estimates that allow you to determine the timing of cash flows. It is important to update it regularly as circumstances change.
Managing your cash flow can be challenging, particularly when your business is growing. It can be frustrating to know that despite having a profitable business, you find yourself having to scramble for cash flow and/or extended credit. This is largely due to business cycles where payments from customers are often received after existing orders have to be funded. As such it is important to have (even informal) processes in place to deal with these issues as they arise.