Your hard work, great ideas, solid customer base and popular products or services are nothing if you can’t effectively manage your cash flow. It’s one of the biggest challenges for any entrepreneur.
“Even a profitable, fast-growing company can face a serious cash flow crunch while waiting for money to come in,” writes the Business Development Bank (BDC) in its guide for entrepreneurs called Master Your Cash Flow. “In fact, it’s surprisingly common for profitable companies to go out of business because they ran out of cash.”
Ensuring you have a business that can be or is profitable is assumed here. Cash flow management isn’t going to fix fundamental flaws, but it’s a critical tool in your toolkit. The BDC’s guide outlines six key steps to master your business cash flow and thrive.
1. Project Cash Flow
Your cash flow projections, plotted on a yearly calendar, will let you spot the “peaks and valleys”
and give you time to create a plan to hang on to some of the revenue from the peaks to cover the expenses in the valley. Projections also give you the flexibility to play with scenarios and options, which can be a valuable decision-making tool when it shows you it’s not the right time to make an investment in technology, or order another container-load of product from overseas.
2. Track Receivables, Expenses & Inventory
Your cash flow projection provides the baseline data that allows you to compare how you’re actually doing with how you expected to do. You might wish to do this check-in monthly or weekly. And it’s a good idea to use your actual data to update your projections once every quarter.
The metrics you’ll want to track include how long it takes your customers to pay you (your average collection period), how long it takes you to pay your bills, your cash on hand, how many days it takes you to sell your inventory and your inventory turnover.
3. Finance When You Can
Treat your cash flow as king, especially when it comes time to purchase that new vehicle, rebuild your website, or expand your product line. That means – don’t use your cash when financing will do nicely. Lenders are more likely to extend financing to something tangible than they are when you come in, hat-in-hand, looking for help because you blew through your cash and then hit an unexpected slump. Worried about overdoing it on loans? Be sure to tie the term of the loan to the lifespan of the asset you’re borrowing against. If you expect the new truck to last five years, don’t take on a loan with a 7-year amortization period.
4. Get Paid Faster
One of those numbers you’re tracking in step number two – your average collection period – will tell you if there’s room to make changes to help your customers pay you faster. Look at your own processes and ensure you’re issuing invoices as quickly as possible, and by all means use technology! Don’t send your invoices by snail mail when email delivers almost instantly! And make it easy for customers to pay electronically, either via a secure web portal, or through mobile payment options that your field staff can whip out to collect while they’re on the customer premises. Consider offering discounts for quick payment and charging late fees for customers who take their time.
5. Control Outflows of Cash
By all means, pay your bills on time. But there’s no reason to pay them before you need to. If you have bills withnet 30 payment terms, pay on day 29 or 30, not on day 2. Keep the extra cash working for you for those additional 27 days. Consider leveraging credit cards, too. Pay the bill by credit card when it’s due, and then pay the balance off the credit card in another 30 days before the interest charges kick in. And, of course, keep a close eye on expenditures and watch for opportunities to reduce.
It’s not magic, but poor cash flow management can be and has been the downfall of many profitable businesses. Don’t let that be you.
This column was originally published by Troy Media.