As a small business owner, cash flow management is one of the most critical aspects of daily operations. With good liquidity or cash flow, money is available for use when needed, which helps with the smooth running of your business. Cash flow problems, on the other hand, can have a serious impact on your commercial success.
By Shiv Nanda
Poor cash flow is not only stressful, but it can also raise a number of other challenges. You may be unable to pay employees their salary on time, miss out on time-bound growth opportunities, struggle to manage expenses and keep your head above water. In fact, liquidity problems top the list of reasons for small business failure!
Here are the top 4 ways to prevent potential cash flow issues and solve existing ones:
- Perform a Cash Flow Forecast – A cash flow forecast can help you track how much money comes in and goes out of your business, and when it does so. Tracking changes in the cash balance over a period of time, whether annually, quarterly, monthly or even weekly, helps you identify how much cash your business will need.
It also helps you gain deeper insight into expenditure and income patterns, so you can make effective business decisions and control unnecessary spending. You can also compare numbers from the cash flow forecast with actual figures to locate discrepancies and make any adjustments required.
- Look into Short-Term Financing – For your immediate cash flow needs, short-term financing can provide an effective solution. Here are some options to consider:
- Business Loan – Like personal loans, short-term business loans tend to have a higher interest rate than long-term financing options. However, the approval process is quick and easy. Short-term loans also work out more affordable if you need money right away and are sure you can repay them quickly.
- Credit Card – For small business owners, paying suppliers on time is essential, and many trade partners will only accept cash payments. If you use a business or personal credit card to pay for other expenses, this helps you free up the cash flow and avoid delays with these cash-only payments.
- Line of Credit – If you need small amounts of money immediately or think you might in the future, a business or personal line of credit can be invaluable. You can usually apply online and get approved quickly. Interest is only due on the amount used, and the credit limit gets refreshed with each repayment.
- Other Financing – Inventory and purchase order financing can help you fulfil new orders on time if past orders have not yet been paid. Inventory financing advances money for inventory purchases, while PO financing directly pays your suppliers for items needed for completing written purchase orders.
- Bring Overheads Under Control – High overhead expenses can have an immense impact on cash flow for your business. Review your commercial leases, vehicle and equipment costs, software, phone and IT services, and other expenditures on a regular basis. Work on reducing unnecessary costs and eliminating waste.
Decide which overheads are absolutely critical to the running of your business, which ones can be cut down for leaner operations, and which ones can be removed completely. Remember, fancy equipment or additional vehicles may be a tax write-off, but they will eat into your liquidity tremendously!
- Improve Your Debt Collections – It’s common for small business owners to run into cash flow problems when they need to pay trade partners but haven’t yet been paid by customers. Work on a collections process that’s consistent and clear, and become proactive with debt collection.
There are a few ways to encourage clients to pay on time, such as imposing late payment penalties after a certain period or providing a discount for payments made within a few days. Outline your policy clearly before starting work, and send out reminders or call clients for debt collection when they fall behind.
If you want to get ahead financially, you need to keep an eye on the bottom line and maintain high liquidity. Good cash flow is particularly important when you’re just starting out, so don’t be afraid to seek help if things are getting tight!
Shiv Nanda is a financial analyst who currently lives in Bangalore and works with MoneyTap, India’s first app-based credit-line. Shiv eats, breathes and sleeps finance, to the dismay of friends who’ve endured unsolicited advice on their investment choices, budgeting skills, or lack thereof. Luckily for them Shiv has diverted this energy toward writing about various financial topics online. He loves it when people actually ask him for advice, so email him your questions at email@example.com. He’ll try not to get carried away with the answers!