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Why Cash Flow Can Make or Break Your Small Business

  • Mar 9, 2015 | Jeanna Barrett

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Post contributed by Jeanna Barrett Head of Inbound & Content Marketing for Kabbage.

Cash flow is one of those aspects of running a small business that seems so simple. The formula is: cash coming in versus cash going out equals cash flow. And if the balance is off, the very heart of the business is in trouble. Every small business requires cash to keep the doors open and fuel future growth. When the cash isn’t there, small business owners have to cut costs, find creative ways to make more money, or find a lending source.

Cash is King

Veteran business owners acknowledge that the saying “cash is king” is more than just an overused cliché – it’s the truth. Small businesses need to raise the appropriate amount of cash to get off the ground and if the cash ins and outs aren’t managed effectively, the company will not survive. Managing cash flow keeps you actively aware of your accounts receivable so you know who owes you what and when you can expect the payment. If you’re managing your cash flow you are keeping an eye on stagnant inventory and are developing strategies for moving it. Managing cash flow allows you to pay your bills on time and develop good relationships with vendors. Cash flow management helps an entrepreneur retain more of the business without necessarily having to sell to investors. Managing and tracking cash flow helps you prepare for the times when there isn’t enough coming in to cover what needs to go out by having short-term solutions at the ready.

You have to begin managing the cash flow of your small business before it ever actually opens for business.

Cash Flow at Startup

The Small Business Administration, SBA, recommends that entrepreneurs in the startup phase of a new venture create a cash flow chart. Tally up all the startup costs and one-time expenses, then add in the monthly mixed and variable expenses and compare it to your sales projection. SBA experts say you have to be aware of what your expenses are going to be to make sure the business is feasible.

Tools for Mapping Cash Flow

You could create your own spreadsheet for mapping cash flow projections or research whether or not your accounting software has a cash flow tracker built in. The Service Corps of Retired Executives, SCORE, is a non-profit that provides business mentoring services to entrepreneurs. It offers a free template that allows business owners to assess cash needs for a 12-month period. The template helps organize monthly expenses, minimum startup costs, a work-up of a sales forecast, and predicts what the cash position of the business will be when comparing cash receipts to expenses.

Managing the Cash Coming In

Even if your sales are good, you don’t have cash coming in until your customers pay their bills. That can begin a vicious cycle of making you unable to pay the business’ bills because you haven’t been paid. Keep accurate records of account receivables that show what has been paid, what is outstanding, and when you should expect that payment. To keep on track with these deadlines you should let your customers know when payment is due, and perhaps even offer a discount incentive for paying early. Issue invoices in a timely manner and follow-up on outstanding payments. If a customer becomes a habitual slow-payer, you could institute a policy of taking a deposit or even insisting that every transaction become cash-on-delivery, COD.

Managing Expenses

As much as you would like your customers to pay you as quickly as possible, to manage cash flow you want to avoid paying any of your bills before you have to. If the bill arrives and it doesn’t need to be paid for 30 days, don’t cut the check until you have to. Consider making digital payments that get to your creditor on time while allowing you to hang onto your cash for as long as possible. Even if your vendor offers a discount for early payment, weigh that against what happens to the cash flow if you are paying bills early. Don’t damage your good credit by paying late, but don’t tie up your cash unnecessarily by paying early.

With a cash flow chart in hand, you can make smart decisions about your own purchases. You can put together a plan for buying supplies, equipment, or inventory when you have the cash in hand. If you are sitting on old inventory, you have a stopping point in the cash flow. You may have to discount the selling price to get it moving.

When You’re Short on Cash

Even with cash flow projections, there may be times you come up short simply because you’re not psychic and every projection won’t turn out to be 100 percent accurate. How do you handle this? Begin by dipping into your reserves. Hopefully, you have saved the equivalent of a few months of expenses for slow times and emergencies.

You may consider bringing in an investor who can provide an infusion of cash when it’s needed. But not every investor will be attracted to a business that has a cash flow problem.

During a cash flow shortfall, assess the expenses that are most critical to meet. Begin with meeting payroll obligations so that you don’t lose any employees. Pay the bills that have come from your most crucial suppliers and talk to the rest about payment plans or deadline extensions. Talk to your own best customers about the possibility of them accelerating their payments.

If you are planning ahead for the possibility of one day being short on cash, you could consider having access to a line of credit through an alternative lender like Kabbage. It is easier to reach out to a funding source when times are good so that you are prepared when times are bad.

photo credit: Money via photopin (license)

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Jeanna Barrett
Avalara Author
Jeanna Barrett
Jeanna Barrett
Avalara Author Jeanna Barrett
Jeanna Barrett is a leader in an innovative marketing movement focused on content, inbound and social marketing. Jeanna is currently Head of Inbound & Content Marketing for Kabbage, which pioneered the first financial services data and technology platform to provide fully automated small business loans. . Kabbage has grown to become the #1 online provider of business working capital and is a Forbes Top 100 Most Promising Company.