cash flow

Cash flow from operations is still the number-one way that U.S. small and midsize businesses finance growth. But just about every small business runs into situations where the cash just isn’t flowing. When that happens, where do you turn?

Some 37% of US small and midsize businesses in the C2FO Working Capital Outlook Survey 2017 say their need for liquidity increased significantly last year compared to the previous year, while 34% say it increased slightly. All told, nearly three-fourths of small and midsize businesses in the survey have greater need of liquidity than they did in 2016.

If they had access to additional cash, some 16% of small and midsize businesses surveyed say they would use the money to meet their current obligations. Overall, however, the highest priority is growth. Here’s how businesses with access to liquidity prioritize their spending:

  • Purchase more inventory or equipment (33%)
  • Expand operations, such as exporting to new markets or opening new locations (28%)
  • Invest in employees through hiring, wages and benefits (10%)
  • Invest in R&D (9%)
  • Create contingency plans to deal with unexpected events (4%)

Finding financing to boost cash flow

The number of small and midsize businesses that turn to funding sources other than cash flow increased by 40% in 2017 compared to the prior year, and survey respondents say it’s easier to access capital from both traditional and alternative financing sources than it was in the past. (Find out more about small business lending options.)

But that doesn’t mean it’s smooth sailing. As you might expect, the smallest companies — those with 1 to 10 employees — are less confident in their ability to access liquidity than larger firms.

The biggest challenge for small and midsize businesses isn’t necessarily finding financing, but finding affordable financing. More than three in 10 small and midsize businesses say high interest rates are a factor preventing them from accessing the capital they need.

Preventing cash flow crises

Late-paying customers are a common problem for small businesses, especially in the B2B world. In fact, almost one-fourth (24%) of US companies in the survey say customers “often” pay invoices late — an increase from the previous year’s figures. Just because you have invoiced your customers for work completed doesn’t mean the money will be in your bank account anytime soon. As a result, a small business can easily find itself cash-poor seemingly out of the blue.

That’s why managing your cash flow appropriately is so important. Do it right, and you should never have to worry about an empty bank account catching you by surprise. Here’s a simple, three-step process to get it under control.

Step 1: Cash flow statement Your business’s cash flow statement is a record of the money that comes in to your business each month (e.g., payments from customers, interest, loan proceeds, etc.) and flows out of your business each month (e.g., rent, payroll, cost of inventory or materials, etc.).

If you use accounting software such as QuickBooks, it’s a simple matter to create a cash flow statement. Once a month (once a week if you’re in a cash crunch), go over that statement to see how you’re doing.

Step 2: Cash flow projection Next, you’ll want to put together a cash flow projection. Similar to creating sales projections, you create a cash flow projection based on your previous cash flow statements. If your business has seasonal ups and downs, you’ll want to have a full year’s worth of cash flow statements to work with; if your business is more stable, three or six months’ worth may be enough to get you started. Depending on your situation, you can forecast out 12, six or three months in advance.

Step 3: Reality check At the end of each month, compare your cash flow projections for the month to your actual cash flow statement. Adjust your projections based on what you learn. Gradually, you’ll be able to create more accurate projections, which will give you a heads-up about possible problems with liquidity down the road.

Without access to adequate cash flow, you can hamstring your business’s plans for continued growth. Don’t let that happen to your small business.

Check out some of our favorite financial resources for learning more about cash flow and these tips for spring cleaning your business finances.

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