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How to Manage Your Small Business Cashflow

Free cashflow is King. It is, in my opinion the single most important item for any business and essential to a small businesses survival because as a small business you simply do not have a long runway to work out cashflow constraints. If you don't have enough cash on hand to pay your suppliers & creditors you are on a very short rope when it comes to your businesses survival. Where large companies have operating credit lines to bridge the timing between money paid out and money collected a small business owner just doesn't have that luxury.



How much does cash flow really impact a business, and what happens when that business runs into a cash flow problem? In the simplest of terms, cash flow is the amount of money that a business has, whether that money is being transferred in or out of the business. Managing that money can be a bit more complicated, requiring some helpful tools and tricks of the trade.


“Cash flow is the lifeblood of every business, without a positive cash flow, the company will incur problems in operating the business”


Factors That Can Lead to Cashflow Problems

Cash flow issues are not reserved for small businesses or start-ups. Even a mature business, corporation or multinational can run into cash flow problems. The reason that cashflow problems can affect any business is that cash flow problems can be caused by fundamental business issues such as:

  • drop in customer or clients

  • outdated pricing where costs have escalated and price to customer has not increased

  • having too many expenses, simple as that may seem

The above examples are pretty obvious but those aren’t the only things that can result in cash flow issues. The issues can be more unexpected such as:

  • a client who is chronically late in paying invoices

  • a dispute over services

  • delay in clearing deficiencies on contracted services

  • an unexpected tax bill

  • changes in the minimum wage

Some of these factors are avoidable some are just part of the joys being a business owner or entrepreneur. At the end of the day here's what you need to understand; The leading causes of cash flow problems are:

low profits, losses, overspending and excessive customer credit.



Here's Our Cheat Sheet to Avoid Common Cashflow Problems in Small Business

The best thing a business owner can do to avoid cashflow issues is to understand the money coming and coming out, know their financials inside and out, and be diligent about saving extra funds for the unexpected.


"Understanding how much money is coming in and out every month, ensuring prompt payment from customers and vendors, paying bills on time, planning for the financial future, and avoiding inventory buildup are key to better cash flow management"




Cheat #1

Have a lifeline.

We recommend business owners consider opening a line of credit even when cash flow is positive. If the Bank won't extend you credit then find a friend or private lender who will. My advice is don't be so concerned about what it will cost you in fees and interest because losing your business is way more costly than a few extra points on $100,000.


At some point (probably multiple points) in the life of your business you are going to experience the gut punch realization that you don't have enough cash to pay for something. To make it worse most of the time it's something that is really important like payroll or much needed inventory. Nothing will keep you up all night more than worrying about how you are going to pay for something that you really need that you dont have the money for. Having that cash lifeline will help bring peace of mind in case of a market downturn, sudden expenditure or even an unexpected growth opportunity.


Cheat #2

Plan Ahead

Most small business owners do not know that there are three primary financial statements not two. Balance Sheet, P&L or Income Statement and Cashflow Statement. why is that? Because cashflow is essential to running your business just as much (more so in my opinion) as what your balance sheet or income statement show.


"Understanding your cashflow statement is imperative to planning ahead to avoid cashflow issues."


A cash flow statement summarizes money entering and leaving a company, detailing cash receipts (from sales) and cash expenditures (from expenses). These expenses include operating expenses like payroll, utilities, insurance as well as taxes and loan repayments.


Take the time and watch this short video on the elements of the cashflow statement. You don't need to know it like an Accountant will know it but do yourself a favour and get familiar with what information the cashflow statement provides you.



 

A cash flow statement (CFS) summarizes the amount of cash and cash equivalents entering and leaving a company.

  • The CFS highlights a company's cash management, including how well it generates cash.

  • This financial statement complements the balance sheet and the income statement.

  • The main components of the CFS are cash from three areas: Operating activities, investing activities, and financing activities.

  • The two methods of calculating cash flow are the direct method and the indirect method.

 

If you are entering a growth phase, take the time to understand what you are going to need to support your business now and down the road. It’s important to realize that any cash flow challenges aren’t going to be fixed overnight. A financial forecast will help flush out the timing of cash flow needs.


Cheat #3

Create a Weekly or Monthly Cashflow Budget

Weekly and monthly cash flow budgets should be created and reviewed by management to understand the financial condition of the company. Cash flow strategies can then be put into place, such as financing long-term assets or developing working capital commitments from vendors. Here's an example of a weekly cashflow budget. It shows the details and more importantly the timing of cash outflows, cash inflows, cash shortages and how the cash shortage is being covered either by existing operating line, owners contribution or private lender.


 

 

Cheat #4

Collect Outstanding Debts

As a small business grows it will have more cash tied up in accounts receivable and inventory. Reducing the amount of accounts receivable or decreasing the amount of inventory a small business is holding can improve an organization’s cash flow.

  • send invoices promptly

  • offer discounts for early payment. If you don't believe that offering discounts for early payment is a good business practice then read my blog Why Early Payment Discounts are More Valuable Than you Think.

  • credit check your customers

  • have a signed contract (fixed price, T&M or specific performance) it will help avoid ambiguity about what you are owed and speed up the collection process.


Cheat #5

Check Your Inventory

Inventory can tie up a lot of cash. Of course, it’s a necessity for many businesses. However, some items will sell more quickly than others. Some items are seasonal, and some simply fall out of favor over time.

If you have a bulk of excess inventory, you can improve your cash flow by selling it. If you have no other option but to sell it at a discount to get it out of your way, DO IT!! Put the money in your pocket. You may encounter a “what if” feeling. What if a surge in popularity (and demand) is right around the corner? It’s important to be realistic and logical when it comes to evaluating your inventory. Keep what sells. Don’t hold on to things out of sentimentality.



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