Learning & Insights
Tips for managing cash flow effectively
Did you know that more than 80% of small businesses fail because of poor cash flow management? Here are nine tips to help manage your cash flow successfully.
1. Create cash flow projections
Track your business' day-to-day cash flow to project inflows, outflows, and any gaps. After collecting these projections for even a few weeks, you'll have good insight into your company's finances and be better equipped to manage cash-flow-related decisions.
2. Collect payments as soon as possible
Once you've delivered your product or service, immediately invoice the customer and note on the invoice that "payment is due upon invoice receipt." Have a process in place to deal with late or delinquent payments—you may choose to charge a fee for late payments. Be sure to follow up on all outstanding balances, or ask a trusted and reliable employee to do so.
3. Delay payables when possible
Early payment to vendors may hurt your cash flow and should be avoided if possible. Postpone payment as long as you can, but make sure you remain consistent with contract terms to avoid any late payment penalties. Slowing the outflow of cash is important, but it's just as critical to maintain a good credit rating and positive relationships with your vendors and suppliers.
4. Set aside cash reserves
Your long-term survival depends on your ability to prepare for gaps in cash flow. What happens if you're delayed in getting paid by a client? Or, your computer system is compromised in some way? Reserving cash in an interest-earning business savings or money market account allows you to temporarily bridge these gaps.
5. Use technology for efficiency
Use an online service to streamline your invoicing and accounts receivable. Track and manage your money using online banking, and consider using accounting software to get a 360-degree view of your business finances.
6. Increase cash flow
Look for ways to increase the amount of cash you bring in regularly. Can you set up contract payment schedules that equal or surpass your costs? Is it feasible to require money upfront for projects, or ask for a security deposit of some kind? Consider prepaid subscription sales to receive upfront cash and secure future sales, or even layaway programs to help you access cash prior to incurring any costs.
7. Reduce unnecessary costs
Cutting or avoiding expenses reduces demands on cash. Review how your business spends money and identify ways to cut back—but be realistic. Some strategies may include repairing equipment instead of replacing it, buying used equipment in good condition, delaying product upgrades as long as possible, contracting complex jobs to consultants instead of hiring internally, and more.
8. Get creative with marketing
Marketing your business doesn't have to cost a lot if you're willing to do a little legwork. Increase your sales by hosting an event in your community, or offering referral incentives to existing customers. Use social media and email marketing to share items of interest with your customers and prospects.
9. Keep credit available in reserve
In addition to cash reserves, it's a good idea to maintain a business line of credit or credit card to use in case of emergencies. Just be sure you can pay off your balance easily so you can continue to build and maintain good business credit.
The bottom line
Effective cash flow management provides the peace of mind you need to focus on day-to-day business operations and plans for your future success.