Proper cash flow management is a key strategy that every business owner must master for long-term financial success. Managing cash flow can be one of the biggest challenges business owners face.
A recent study from Intuit found that 61% of small businesses around the world struggle with cash flow. Nearly one-third of those surveyed are unable to either pay vendors, pay pending loans, or pay themselves or their employees due to cash flow issues.
To combat this struggle and stabilize cash flow, there are many tactics you can incorporate into your business model. The first step is to determine the cash flow your business needs.
Jay Singer, senior vice president for small business at Mastercard, said this is done by analyzing the current state of your business.
"It's important to understand how much cash you've been using and plan to use, as well as the length of time it will take to acquire more cash," Singer told Business News Daily. "While every business's needs are different, it would be wise to have enough cash on hand to cover up to six months of your average cash outflow."
An important element of your business model that can help with cash analysis is having proper accounting standards in place. While businesses can run on a cash or accrual basis, Rohit Arora, CEO of Biz2Credit, advises every business to take advantage of both.
Here are some tips from the experts on how to manage your cash flow.
1. Borrow money before you need it.
The best time to solve a cash flow problem is before it happens. If your business is running smoothly or is in the beginning stages of production, now is the time to borrow money. By opening a business line of credit when your numbers are good, you can avoid the risk of rejection later on. This will also provide you with resources to fall back on, should you experience the growing pains associated with starting a business. Arora said a business line of credit can be a lifeline for small businesses, particularly those impacted by seasonality.
"Whatever amount you think you will need, ask for double; you might not get it, but it's better to have reserves to draw from when times get tough," he said. "If you can get a small business loan at 10% or less, your cost of capital will be so much lower than if you put purchases on credit cards that carry rates of 19% or more."
For businesses that have already been consumed with high-interest credit card debt, Arora recommends refinancing. For example, if you made several purchases on credit cards that come at interest rates of 20% or more, consider getting a business line of credit that might be available for as low as 6% or 7% interest.
If you have yet to open any credit cards and are struggling for a loan, Singer suggests getting a small business credit card with an interest-free grace period to support your short-term financing needs. He said credit cards can highlight opportunities to save, and many even come with innovative reporting options that illustrate spending trends to help business owners optimize their cash flow.
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2. Re-evaluate your business operations.
Continually review your cost structure to find efficiency gaps and implementations that can be modified to increase savings. Arora suggests identifying parts of the operation that can be outsourced to freelancers and third-party providers. This will allow you to get the job done without providing salary and benefits. He also suggests that businesses scale back part-time staff during slow periods.
In addition to outsourcing, Alex Shvarts, CTO of FundKite, recommended other areas of operation that should be frequently monitored, evaluated and improved.
"Certain areas of business operations can be re-evaluated and updated for efficiency," he said. "[These include] shipping costs, use of middlemen, extra employees, allotted overtime, marketing returns, overdue invoices, rented equipment payments, stocking up on materials when tariffs are low and potentially asking vendors for a break."
As the economy changes, your business strategies will too. It is important to always look for ways to improve your product and invest in smarter solutions.
3. Restructure your payments and collections.
Restructure your payments to your vendors to create a more balanced income for your business. By restructuring payments, you can turn your vendors into your lenders. If you are unable to restructure payment dates, consider restructuring payment costs. You can do this by meeting with new vendors who can potentially provide inventory and supplies at a better cost. Arora said that even if you are not looking to replace your current vendors, you can use the information from competitors as leverage to get better pricing.
You can also benefit from restructuring how your employees are paid. Although a minor detail, how often your business runs payroll can provide some cost savings. Shvarts said switching to a less frequent pay type can save on the administrative costs of collecting, verifying and tabulating payroll information. Implementing direct deposit can help stabilize your payroll withdrawals as well. If you already have a payroll system in place, be sure to assess any fees that may be associated with switching frequencies.
The structure of your debt collection process can make a big difference as well. It is important that you are prompt on your collections and take aggressive follow-up action on past-due accounts receivable when necessary. Set up a continual collections process of reminding accounts receivable when and what they owe you. Invoices that you let slip through the cracks can add up. [Interested in alternative small business loans? Check out our best picks and reviews.]
4. Monitor where your money is going – debt and savings.
Taking on debt isn't always a bad thing. Sometimes borrowing money can be a temporary fix until your business is healthy enough to make it on its own. However, anytime you take on debt, you should carefully monitor and evaluate the extent of your cash flow.
"While taking on debt can be key to coasting through hard times, a business should still calculate how much debt they can take on as to not be overleveraged," Shvarts said. "The debt will be paid back either through investing in growth or once an invoice is paid by the client, but those both require factoring in time, interest, ROI and more."
Strategically borrowing money can be a viable option, as long as you have a repayment plan in place. You should monitor your other expenses and make changes where needed. You may have to shift from a long-term investment mindset, such as the desire to buy equipment, to a short-term survival mindset, such as leasing equipment.
Alongside examining your debt and expenses, you should monitor your savings. Although balancing growth capital and working capital can be difficult when working with thin profit margins, Shvarts said it is important to always maintain a rainy-day reserve in case of emergency. If you don't have a business savings account, it is time to re-evaluate your profit structure.
"Keep reserves of extra cash, not just for hard times but for when a growth opportunity comes along or financial flexibility is needed," said Shvarts. "Growing a business greatly strains cash flow, [since] you have to invest and bring on expenses before the higher revenue kicks in. By all means, grow, expand, turn your small business into a big business, but still save some money for an unexpected market dip while you're in the process of expanding."
5. Take advantage of technology.
As a business owner, you should take advantage of technological advances and AI-enabled solutions, like new apps and software updates. These can streamline your business processes and increase efficiency. Although technology can help with any sector of your business, Shvarts specifically recommends using it to create budgets and project cash flow.
"When you can see all accounts payable and accounts receivable, plus the other financial intricacies of your business, in one spreadsheet, you can budget and easily project future cash flow," Shvarts said. "Depending on which software you choose, your information will be secure in the cloud, so you won't risk misplacing or damaging paper documents."
The right technology and the right business strategies can make a big difference for your company. They allow you to spend less time worrying about cash flow and more time running your business. If you don't feel confident in overseeing your cash inflow and outflow, you can always hire a CPA or bookkeeper to do it for you. Regardless of who manages your cash flow, it needs to be done.
"The point of running a business is to make sure your revenues exceed your expenses and to generate a profit," said Arora. "Managing cash flow is critically important to running a profitable business long-term."