At the center of nearly every small business is its cash flow. Cash flow is the amount of money that comes in to your business, how much goes out, how much is owed to you and how much you owe. It is a simple concept that can hinder small business growth when not adequately managed.
In fact, poor cash flow management is one of the primary reasons small businesses fail. Even if a business has a lot of money coming in (positive cash flow), mismanaging that money can lead to problems.
We have put together these five strategies for managing cash flow:
In most cases, you are in business to provide a product or service in exchange for payment. So while it can be hard to follow up on unpaid invoices or pressure clients to pay, doing so is essential to your cash management. Carefully record and track each invoice sent, payment received, and delinquent payment to assure you are not leaving money on the table, or negatively impacting your cash flow.
Just like in personal finances, a business should always have a reserve (emergency) fund to cover slow periods or unexpected expenses. If possible, have enough cash on hand to cover three to six months of expenses, and to help ensure that you never fail to cover important costs like payroll or inventory.
With many manufacturers and material providers offering discounts for buying in bulk, it can be tempting to order an excess of inventory in exchange for savings. But idle, or worse, expired, inventory comes with costs, and those must be weighed against the savings. When possible, keep only enough inventory on hand to meet your customers’ needs.
This is two-fold: You should be careful of borrowing too much credit or extending credit to your customers. When borrowing to cover costs of equipment or inventory, you want to be mindful of payments and interest and make sure you can handle the terms of your loans. Or, if you allow customers to pay over time, have a credit approval process in place to make sure your clients will be able to pay.
When a business is healthy and making money, it can be tempting to spend that profit. Instead, consider what you are spending and whether it improves the health of the business. For instance, a piece of equipment to replace a malfunctioning unit may lead to greater productivity, while a top-of-the-line espresso machine for the break room may not (though there can be benefits to increasing employee morale). If you need a place to stash extra cash, consider your reserve fund (see tip #2).
By keeping tight control over your cash flow, you will be better able to manage the ups and downs of your business, and keep your business healthy and strong.
Credit products are offered by U.S. Bank National Association and subject to normal credit approvals and program guidelines. Some restrictions and fees may apply. See a banker for details.