Starting a small business comes with countless questions and concepts to ponder and analyze. Among the most essential is cash flow. Caron Beesley describes its importance as “the lifeblood of a business and critical in its growth” in a story for the Small Business Administration website:
“Small businesses are hugely dependent on their cash flow, and must either cut costs or scramble to find alternative funding when they are not being paid on time. With money tight and bank loans hard to get, a cash-strapped company can easily be pushed to the brink.”
Here’s a look at how small businesses can make cash flow a top priority.
Cash flow should be a primary focus right from the start, and one of the first things considered by a prospective small business owner. If this analysis reveals a dim view of the financial future, the business may not be realistic. In Beesley’s SBA story, she advises creating a cash-flow chart to examine the potential impact of business expenses.
“Make a list of all the startup costs or one-time expenses, your monthly fixed and variable expenses, and project your sales to see if this business is feasible,” she writes. “Without knowing your costs and expenses, you will not be able to project your income needed to make a profit in your business.”
Optimism and realism
Optimism can be a valuable trait for a small business owner. Taking that leap into owning a business should come with a healthy dose of positive thoughts and attitude. In a story for Entrepreneur, Jared Hecht, CEO of Fundera, notes that “relentless optimism” is a plus: “After all, what realistic person would persevere in the face of so many obstacles, so many naysayers and so much stress?” When it comes down to sales projections, however, Hecht notes the importance of being realistic.
“By applying quantitative forecasting methods, you can use actual past revenue data from your own business or other businesses in your industry as a basis for tracking trends and predicting future sales,” he explains. “This information, along with some objective intuition, will help you come up with more realistic future sales projections. Revenue forecasting can be especially difficult in your first few years of business because you don’t have past sales figures or as much experience to draw from. This is where working with a mentor from within your own industry may be extremely useful. A good business mentor can offer his or her own experience to help you project future sales, and even offer historical sales figures from personal experience to help you predict upcoming sales volumes.”
Get everyone on board
Concerns about cash flow will naturally fall primarily on the small business owner, but the responsibility can be shared among many. The policies put in place should allow employees to contribute to the effort. In a story for Inc.com, Matt Quinn writes, “If improving cash flow is a priority, make sure all of your employees understand that.”
“Remember that your employees will be motivated by the targets you set for them,” he says. “Obviously, collectors should have collection targets. But even your sales staff should be on board. If a salesperson only has a revenue goal, he or she will work to meet it, regardless of whether the invoices are paid on time or in full. Instead, institute a policy where, if something is written off, the revenue is backed out of commissions.”
Though this may sound obvious, small business owners will need to consider how and when payments arrive. In an ideal scenario, clients would be reliable and timely. But that won’t always be the case. This story by Entrepreneur lays out how receivables can be structured to ensure that a business keeps the cash flowing. Here are some of the recommended steps.
- “Offer discounts to customers who pay their bills rapidly.”
- “Ask customers to make deposit payments at the time orders are taken.”
- “Require credit checks on all new noncash customers.”
- “Issue invoices promptly and follow up immediately if payments are slow in coming.”
There are some similar concepts between receivables and payables, though there are expense tweaks that can be used to benefit the business’ cash flow. Among the recommendations in the Entrepreneur story:
- “Take full advantage of creditor payment terms. If a payment is due in 30 days, don’t pay it in 15 days.”
- “Use electronic funds transfer to make payments on the last day they are due. You will remain current with suppliers while retaining use of your funds as long as possible.”
- “Communicate with your suppliers so they know your financial situation. If you ever need to delay a payment, you’ll need their trust and understanding.”
- “Don’t always focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price.”
New small business owners may be surprised at the array of expenses that are necessary to get the business up and running. They may also be tempted to purchase unnecessary items or services. As Hecht writes, new entrepreneurs may “fall prey to gross overspending — especially in the first few months of business.”
“The reality is that while, yes, it does take money to make money, not all startup expenses are created equal,” he explains. “Starting a business involves plenty of clearly beneficial expenses — costs that will benefit your company’s profitability in measurable ways. But there are also plenty of consultants, advisors and B2B service providers who would be happy to take your startup’s capital for things you don’t actually need. If you want your business to make money, then keep your eye on the bottom line, considering the cost-benefit of every single expense. After all, every dollar you spend on your business is a dollar that is ultimately taken away from your profit margin.”
Have a reserve fund
No one wants to ponder the worst, but there is value in recognizing that things in business can quickly go south. Setting money aside for these scenarios may be a saving grace in difficult times. As Hecht writes, “If your company is working from a zero account balance, one slow sales month could mean instant disaster.”
“To safeguard your business from cash-flow issues, maintain an account balance equivalent to at least two months of operating expenses,” he advises. “That way, even if you experience unexpected stalls to cash flow, you have reserves in place to protect yourself.”Business & Finance Articles on Business 2 Community