You have money coming in, and you have money going out. The balance between those is cash flow. It sounds simple enough in theory, and yet as many as 82% of small businesses fail due to sudden changes in your business cash flow.
In practice, cash management requires close attention to detail. Business decision-makers need to pay attention to factors that include:
- Accounts receivable: The money owed to your business from customers can hinder positive cashflow.
- Accounts payable: The outstanding balance owed to your vendors, likewise, can stunt revenue, especially if you’re slow collecting A/R.
- Inventory: Particularly as a company grows, inventory can have a pronounced impact on cash flow if you lack the means to cost-effectively move that inventory.
- Sales: You need a consistent source of cash coming in, and ruling out venture capital, that will most likely come in the form of sales.
But even business leaders who carefully scrutinize all of these may encounter sudden changes in your business cash flow. In fact, they should expect the unexpected when it comes to cash flow – especially new businesses that are new to ebbs and flows of commerce in their markets. Everything from economic downturn to seasonal shifts, political sea change, environmental disasters, customer bankruptcies and more can affect your cash flow. Imagine, for instance, if one of your customers becomes insolvent and can’t cover its outstanding balance. Even if up to that point you’ve done everything right as a business, you may find yourself in a bind.
As those situations arise, here are a few pointers that may help you resolve your cash flow issues:
1. Expedite invoicing
Ideally, your business will do this well before it runs into a cash flow crisis. Expedited A/R means faster access to your cash, which can help keep your balance out of the red. A few easy ways to organize and expedite invoicing include:
- Use QuickBooks or another accounting software that helps you keep track of receivables and payables.
- Accept ACH transfers and/or make online payment options available.
- Offer discounts for early payment and impose penalties for late payments.
- Set up auto-billing.
2. Look into invoice factoring
If you’re already in crisis mode, consider working with a factoring company that can give you a cash advance on money owed to your business. Invoice factoring only works if you’re an invoicing company, and it comes with a fee. Furthermore, you can only access a percentage of the amount owed your business. Still, factoring can be a lifeline when you’re caught in a fiscal undertow. Just remember this is a short-term solution, not a substitute for resolving the issues that put you in jeopardy in the first place.
3. Consider a small business loan or line of credit
Assuming you meet a lender’s qualifications (not a given if you’re hitting cash flow turbulence), you may be eligible to receive a short-term business loan. Again, this is a temporary fix that can help keep your head above water. If you suspect you may run into cash flow problems in the near future but aren’t in panic mode yet, a business line of credit may be a better option. It will help you avoid borrowing more money than you need – money that you’ll ultimately have to pay back with interest.
4. Find creative new sources of revenue and trim the fat
Lease underused equipment on the weekends. Consider offering delivery for an extra fee. Rent out additional space to other vendors. Offer training services for your products. Sell your products at local events. Start a side-hustle if you need to. Get creative about monetizing the resources you have to earn extra income.
When all else fails, start slashing costs. Shorten business hours during the off season. Renegotiate contracts with vendors. Restructure employee schedules. Any expenses that are not integral to your ability to be operational will need to go so you can make ends meet.
Clearly, cash flow is more complicated than meets the eye. At Bank Midwest, we offer Cash Management services and financial counsel that can help you manage your funds more effectively, and stay out of the red.
Get in touch with an expert today to learn more.