One of the most common, and often most painful, challenges that small businesses face is managing cash flow. Being able to make payroll, cover the bills and invest in equipment or new products can feel impossible when things are tight. The ebb and flow of business revenues can lead to worrisome uncertainty and extreme stress that can ultimately threaten a business’ survival.
But there is good news. With careful planning and preparation, you can prevent some of that stress and rein-in the uncertainty. Below, we dive into some cash flow basics and then share nine tips to help prevent and mitigate cash flow problems.
Understanding Cash Flow Management
For anyone just starting out, the idea of managing cash flow may seem arbitrary or simply out of your control. But by examining your cash flow history, and strategically looking at upcoming potential and known expenses, you can develop and implement cash flow management strategies that keep you ahead of the curve.
For example, every business experiences revenue ups and downs as overall economic conditions change. While you can’t always anticipate a downturn, knowing your fixed monthly and annual operating costs is the first step in determining your basic income needs. Next, factor in any potential unknown expenses, like employee overtime or equipment repair and replacement. (You can add a prorated savings amount for these unexpected costs to your budget, to help build up an emergency reserve, which we’ll discuss further on.)
From there, you can start predicting your cash flow cycles by considering your expenses with the cycles of your customers, vendors and other factors.
Calculating Cash Flow
There are three main methods of calculating cash flow, and each serves a unique purpose. Calculating each helps you refine your plan by examining your cash flow needs from multiple angles.
Free cash flow: This is the amount of available capital for re-investing in your business through equipment, resources or product development.
Net income + Depreciation + Amortization – Change in Working Capital – Capital Expenditure = Free Cash Flow
Operating cash flow: This is your day-to-day needs to operate your business.
Depreciation + Operating Income – Taxes + Change in Working Capital = Operating Cash Flow
Cash flow forecast: Use this formula to project cash flow per month, quarter or year.
Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash
As you move throughout the year, it’s important to revisit these calculations and adjust for any anticipated or actual changes like inflation or supply issues, etc. that could negatively impact your cash flow. Information is power, and staying on top of your budgets and cash flow projections keeps you nimble and adaptable to business cycles.
9 Small Business Cash Flow Problems and Solutions
Now that you have a basic understanding of how to calculate cash flow and some ideas on how to manage it, let’s take a look at nine common cash flow problems and how to solve them.
1. Tighten up Invoicing
Though it sounds counterintuitive, some businesses wait too long to send out their invoices. If you invoice monthly, with 30-day terms, you may not see payment for 30 days or more. If you have expenses against that invoice, like subcontractors or production costs, you’re potentially delaying your ability to pay those costs or wiping out your reserves to cover them.
Consider shifting your invoicing to a more rapid cadence, such as weekly or after you’ve completed a certain number of billing hours or services. If you only invoice monthly, and complete work on April 1 but don’t invoice until April 30 with 30-day terms, it can be 60 days before you see payment. The faster you get the invoice out, the faster you get paid.
2. Boost your Sales
It sounds obvious, but it warrants repeating: You can directly and immediately impact cash flow by increasing sales. This is where creative marketing strategies come into play. If you’ve determined your expense needs as outlined above, you know exactly how many products or services you need to sell on a monthly basis to cover those expenses.
Dedicate time to fully research your target market and ensure you’re meeting them where they are. Tidy up your online presence to make sure you’re getting in front of the right audience. There are many free online marketing courses that can get you up to speed on best practices that you can quickly implement such as improving your SEO, targeting your social media strategy, or devising incentives like discounts or short-term promotions to pick up more sales.
3. Charge Late Payment Fees (or Reward Early Ones)
If your customers are paying their invoices late, it can create a domino effect that impacts your ability to cover business and employee expenses. The solution is to start charging interest on late payments. This will incentivize your customers to pay on time, and it will give you a little extra cash to help cover your expenses.
Another tactic to prevent late payments is to offer discounts for early payments, or for paid-in-full options that avoid installments. This will incentivize your customers to pay their invoices on time, helping you maintain a healthy cash flow.
4. Plan for Unexpected Expenses
Unexpected expenses can take out a small business at the knees, as they can quickly eat into your cash reserves or wipe them out completely. Establishing an emergency fund is the best way to protect yourself until you can generate more revenue.
A good rule of thumb is to put aside enough cash to cover three to six months of your operating expenses and consistently set aside funds throughout the year to build up that amount. If you dip into your reserves, create a plan for replacing that money as soon as possible and add it to your budget.
5. Be Smart with Inventory Management
If you’re not managing your inventory properly, it can lead to several cash flow problems. For example, you might end up tying up too much money in inventory that isn’t selling, or you might have to sell items at a discount because they’re about to expire.
Implement an effective inventory management system to keep track of your inventory levels, how products are performing, and ensure that you’re only stocking items that are selling.
6. Take a Hard Look at your Operating Costs
If your operating costs are too steep, it’s nearly impossible to generate enough revenue to cover them. Examine your expenses and look for ways to reduce your overhead costs. Do you really need all of your office space? Can you re-negotiate your lease? Can you lease new equipment instead of purchasing? Realistically analyze every expense to find potential savings.
Additionally, consider outsourcing parts of your business to third-parties or freelancers. This can free up your time to focus on more important income-generating tasks like marketing or business development, and it can also save you money in payroll taxes and other full-time employee costs. For example, a photographer may outsource basic retouching and free up that time for additional revenue-producing sessions.
7. Speed up your Payment Processing
If it takes too long for your small business to process incoming payments, it can quickly strain your cash flow. It seems like a no-brainer, but getting your payments in the bank as soon as possible only helps you. Shorten processing times even more by investing in a good payment processing system. You’ll eliminate check-clearing delays with electronic payments, making your funds available to you that much faster, often the next business day.
8. Make a Budget and Stick to it
If you don’t have a good handle on your small business finances, you can’t realistically plan for the future, which sets you up for cash flow problems down the road. Create a budget and track your expenses carefully. With regular budgeting and expense monitoring, you quickly be able to identify areas where you can cut costs and you’ll have a more accurate basis for predicting future needs.
9. Borrow Money Before you Need it
Taking on debt isn’t always a bad thing. Some businesses simply need a quick infusion of cash to get back on a solid footing and put them ahead of unforeseen revenue dips. The best time to solve a cash flow problem is before it happens. Borrowing money while your numbers are good not only minimizes your risk of rejection, but also provides accessible resources to prop up a fledgling business as it works through growing pains.
Of course, be sure to implement a viable repayment plan for any debt you incur, and calculate that into your cash flow management strategy.
Be Proactive to Solve Cash Flow Problems in the Future
By following the advice above, and using the methods for managing cash flow you’ll be on a solid footing to avoid cash flow problems. Creating a budget, tracking expenses, and regularly reviewing financial statements will better position you to identify potential problems before they become serious. Looking for more tips? See our advice on protecting your business from a recession with more ideas on cutting unnecessary overhead.
Need Solutions To Cash Flow Problems? LendThrive Can Help
When you’re looking for a term loan to cover unexpected expenses, we can provide the funding you need to cover unexpected expenses or help you take advantage of opportunities that require quick access to capital.
Contact us today to learn more about our loan offerings and how we can help you solve your cash flow problems. We’ll be happy to answer any questions and help you find the best financing solution for your business.
You can also apply now to see if you qualify and get as much as $150,000 in 24 hours.