Healthy cash flow is integral to a business’s success. Without it, you can miss bills, fail to pay staff, leave suppliers unhappy, and be at an increased risk of failure or insolvency. The outlook is certainly grim for any business owner struggling to manage their cash flow. Fortunately, you don’t have to wait until you’re in trouble with your cash flow before you put measures in place to improve it. At any stage, you can take these actions:
Rent Instead of Buy
If you need new equipment, machinery, or vehicles, you may assume that you have to buy them new and take the depreciation hit. However, that’s not always the case. Businesses like Texas First Rentals exist that let you lease equipment for the period you need it.
Rather than spending thousands of dollars on heavy machinery upfront, you can pay a much smaller rental fee that is far less impactful on your bank balance. Many businesses prefer this option because it preserves your working capital and keeps your cash free for payroll, inventory, growth, and other costs.
Best of all, you don’t need to try to sell the equipment or vehicle once you no longer need it for a project. You simply return it or upgrade it for something else as your project needs change.
Invoice Promptly
Promptly invoicing your clients or customers for goods or services you provide is crucial to being paid as quickly as possible. If you don’t keep on top of invoicing, your cash flow can quickly dry up or become inconsistent.
Send invoices with clear, short payment terms as soon as work is completed or your products are delivered. If you’re traditionally inconsistent or late because you’re busy, use automated invoicing tools to streamline and speed up part of the process. The sooner you invoice your customers, the sooner you can get paid, and the healthier your bank balance can often be.
Be Attentive to Accounts Receivable
You can’t simply assume that sending an invoice will result in payment when you need it. The reality is that not every customer pays on time, and some need a gentle reminder, or even more than one. That’s why it’s so important to pay attention to your Accounts Receivable. Tracking payments helps you understand what your financial situation is at all times, based on customer payments.
Track outstanding invoices with your accounting software and follow up with polite reminders or calls for late payments. Many top-rated accounting software providers even allow you to set up automated reminders to avoid having to take care of this uncomfortable job yourself. If customers routinely don’t pay on time, consider offering early payment discounts to encourage prompt payment. All these actions can go a long way toward improving cash flow.
Review Your Expenses
The first few years can be tough for small business owners. In fact, around 20.4% of new businesses fail in the first year, and 49.4% fail by their fifth year. That’s why reviewing and reducing expenses is crucial for any new business. The more money you save, the more you free up for critical operations and growth.
Audit your business bank accounts to see where your money is going and where you can spend less. Once you’ve thoroughly reviewed your expenditures, start reviewing your suppliers. You may be able to negotiate better rates that increase your profit margin.
Create a Cash Reserve
As a business owner, you’re in charge of making sure you and your employees are paid fairly during every pay cycle. This doesn’t change, even during tough times or when unexpected expenses arise.
To ensure you can still keep on top of your everyday costs when facing challenging times, create a cash reserve. Set aside a percentage of your profits and let it build up to cover around three to six months of operating expenses. Should the worst happen and your business fails to make a profit, you have an emergency fund to fall back on while you work to get back on track.
Slow Down Your Outgoings
It can sometimes feel as though your bank account is emptying faster than it’s filling up. When you fear a shortfall, slow your cash outflows. This can involve asking vendors for longer terms, such as extending your payment window to one or two months. You can also time it so you pay your bills right before they’re due, rather than the day you get them.
Prioritize Inventory Management
You may be surprised by how much money can be tied up in business inventory. Rather than sitting in a storage room, that money could be used elsewhere in your business. Therefore, new and seasoned business owners alike should prioritize inventory management.
This involves tracking inventory levels to avoid overstocking. Fortunately, there is inventory management software to help with this. You can also use such tools to forecast demand based on your historical sales data.
Depending on how long it takes to receive stock, you might even implement inventory practices that see you ordering stock just before you need it, rather than far in advance.
If your business already has a great deal of stock sitting on shelves for an extended period, start discounting them and turning them back into cash to pay for future goods. You can also do the same with any unused gear or equipment, like vehicles, tools, and machinery.
Plan for the Slow Seasons
Most businesses have a ‘slow’ season. This is when their sales dip, and fewer customers walk through the door. If your business is one of the many that experiences seasonal fluctuations, make sure you plan for them.
Save money during your peak seasons to cover the slow ones. You can also offer special deals during those slower months to encourage customers to return. It can even be a smart business practice to align your expenses with revenue cycles to avoid stretching your resources.
Owning a new business can be exciting, but it can also be overwhelming without the right financial knowledge. Prioritize cash flow practices from day one, such as inventory control, consistent invoicing, and emergency funds, and you may improve your chances of avoiding common financial pitfalls.
