You often hear about motorists who suffer breakdowns in the worst possible places because they didn’t bother to check their tires regularly, ignored their dashboard warning lights or ran out of gas.
Many small business owners do the same thing when it comes to managing their cash flow. When they don’t make regular checks and forecasts, or ignore troubling trends, their businesses will break down because they don’t have the resources to pay their bills. When you’re out of cash, you’re out of business!
That’s why good cash flow management is one of the cardinal rules of small business ownership. And it’s relatively simple—make sure more cash enters the business than goes out and that there’s always enough on hand to meet obligations when due, like operating expenses, payroll, taxes and loan payments.
Several strategies are available to influence both sides of the cash flow equation. To boost inflows, consider asking customers for all or a substantial portion of their payment up-front, especially if placing a special order or incurring materials and labor costs to produce a product being ordered. Service businesses and contractors should collect an initial up-front payment and then progress payments as the work progresses. If you do sell on credit terms, be selective and make sure customers understand and adhere to your payment terms. Prompt follow-up is essential once an account becomes past due.
Even with their merchant fees, credit cards are a great way to bring in cash immediately when the product or service is purchased and it may result in incremental sales not otherwise available, if you accept only cash.
As for outflows, an operating budget is an ideal way to plan and track specific due dates for recurring expenses, and to avoid overspending on certain categories unless absolutely necessary. That way, you’re never surprised when a bill arrives.
Other tactics for keeping cash in the business include marking down and selling slow-moving inventories, leasing certain kinds of equipment instead of buying it outright, recycling and reusing supplies where possible, and evaluating your processes and procedures to make sure they’re as efficient and cost-effective as possible. Adding discretionary spending only when it is absolutely clear that you can afford it is another cash flow management technique. If you have employees, their front-line perspective is a great source of insights and ideas for doing things better.
SCORE believes the most important cash management tools are awareness and planning. Regularly monitoring your small business’s sources and uses of cash will enable you to spot trends to capitalize on, and payment problems that can be avoided. Identifying inflow and outflow patterns will also help you project anticipated revenues and expenses three, six, and 12 months in advance. With this information, you’ll know when inflows and outflows are more likely to go out of balance, and prepare accordingly. In the Oxford Hills many businesses experience a seasonal slowdown during the winter months which often results in cash outflows exceeding the inflows. This needs to be planned for months in advance when cash flow is stronger. Cash flow gaps are a normal part of a seasonal business cycle and planning for them is essential.
Cash flow is just one of the many critical financial issues small business owners must manage in order to achieve success. Oxford Hills SCORE is available to help you develop cash flow projections for your small business. Call SCORE at 743-0499 for a free confidential consultation and guidance on cash flow projecting or other business needs. For more information, visit www.oxfordhills.score.org.
This topic was selected for publication from the SCORE archive of resource materials by John Huffman, SCORE small business mentor.