Cash flow mismanagement can be fatal to even the most successful small businesses. In fact, it’s cited as one of the top reasons why small businesses fail.
Your cash flow is the amount of money transferred into and out of your business on a weekly, monthly, or yearly basis. This ratio of expenses to revenue paints a picture of the company’s financial performance, as well as how flexible and “liquid” the business is.
One day you’re chugging along, making a decent profit while covering your costs—and the next, an unexpected expense or emergency puts you on the path towards bankruptcy.
While a positive cash flow is a great goal for any small business, a consistently positive cash flow is even more important.
While a positive cash flow is a great goal for any small business, a consistently positive cash flow is even more important. If, in studying your cash flow, you notice peaks and valleys on your statements, that’s a problem. An untimely expense that hits you at a cash flow low point will mean trouble — as you may not be liquid enough to cover all your recurring and new costs.
With that in mind, here are five things you can do to even out your cash flow, giving yourself a cushion that can help keep your business afloat:
Obtain a business line of credit
One of the most sought-after business financing products on the market is the business line of credit. That’s because an LOC is flexible, and you can keep it in your back pocket to use in case of emergencies.
A line of credit is a bit like a credit card. A lender grants you access to a pool of money. You can draw as much as you need (up to your credit limit), repay your draw according to your terms, and then draw again — or make multiple draws, paying off each one on its own schedule. Assuming you maintain responsible spending habits, you can continue using your line as you need it. You won’t pay to leave the line unused.
With a business loan, on the other hand, once you repay the amount lent to you, you’ll need to reapply if you need more money at a later date. And unlike a credit card, lines of credit can be for hundreds of thousands of dollars, if not more.
In a cash flow pinch, you can use your LOC to pay off any large, unexpected expenses.
In a cash flow pinch, you can use your LOC to pay off any large, unexpected expenses. You’ll need to pay back the principal plus interest, but that can beat defaulting on another payment, or not making payroll that month.
Tighten customer payment terms
If you have the type of business where you extend trade credit to customers — giving them Net 30 (also known as 30 days) to pay you for your goods or services — you may find yourself with cash flow issues as customers use all 30 days (or more) to pay you for your work.
There are a few ways you can tighten up customer payment terms, making sure customers pay you more quickly:
- Shorten your terms to Net 15 or Net 10: Some businesses may not agree to pay within 10 days, while others (particularly bigger clients) may not bat an eye. You won’t know until you ask.
- Impose a late fee: Start charging clients a small but noticeable fee for paying their bill beyond your payment terms. This will cut down the number of times you need to wait for payment.
- Offer small discounts for early payments: Even a token discount—1-2% of the total—may be enough to get some clients (especially other small businesses that want to reduce their expenses) to submit payment right away.
Negotiate new terms with long-time suppliers
If you have your own suppliers to pay off, it’s time to turn around and see how far you can (respectfully) extend your own payment terms.
This tactic will be particularly effective with long-time suppliers with whom you have a good relationship. If they’re in a position to wait an extra 15 or 30 days for payment, they may be comfortable allowing you to extend your payment schedule to Net 45 or Net 60. This is another situation where you won’t know what money you could save, or hold on to a bit longer, if you don’t ask.
Pay your quarterly taxes
New small business owners, particularly sole proprietors, often take on the task of handling the company’s accounting themselves. If you do so, it can be helpful to use tax software or a program that will help you stay organized — and pay your quarterly taxes.
When you’re self-employed, that same rule applies, so it’s important to learn about and understand paying your quarterly estimated taxes.
Employers typically withhold your federal income taxes, paying them to the government. That’s because the government doesn’t like to wait for its money. When you’re self-employed, that same rule applies, so it’s important to learn about and understand paying your quarterly estimated taxes.
Not only is paying your quarterly taxes important for legal reasons — you don’t have to pay them each financial quarter, but you may be subject to penalties if you fail to do so — but you’ll create a more consistent cash flow schedule if you make smaller payments throughout the year rather than one lump sum that can wipe out your profits in one swoop.
Finance some expenses with a business credit card
Sometimes all you need is a little bit of breathing room. One way to get that is to finance your smaller expenses — office supplies, company events, equipment upgrades — with a business credit card.
There are some business credit cards with a 0% APR in the introductory period.
A credit card is essentially a short-term loan that, if you pay off quickly, accrues no interest. There are even some business credit cards with a 0% APR in the introductory period (sometimes lasting more than a year). That’s an interest-free loan over the life of the offer.
Not only does paying with a credit card give you a few extra weeks to pay off your purchases, but some cards reward you with various perks, purchase protections, insurance, and points that you can reinvest in the business.
Once you arm yourself with the tools and practices you need to make your cash flow more consistent, it’s time to start modeling and forecasting your cash flow if you don’t already. You should always keep an eye on your net cash flow and ending cash balance each week and month.
If you see areas where positive cash flow is faltering — such as a mid-month or end-of-month drop — it’s time to start using those tools to extend your payments, recoup what you’re owed, or finance a few purchases. Consistency in this area will give you peace of mind, and allow you to focus on other pressing areas of your business, such as innovation and growth. In many ways, consistency is the key to small business success.
Have any questions about this post? Feel free to ask them in the comments!