Cash flow is the largest determining factor of a small business’ success or failure. Before a company opens for business, there should be a plan in place for managing cash flow.
Every company will experience a lull in sales, late-paying customers, a contract that didn’t come through or economic factors that affect the bottom line. When that happens, owners can be forced to cut costs or secure alternative funding. It’s critical to be strategic with processes and set expectations for customers from day one regarding your accounts receivable policies.
The first course of action is to work with a trusted bank that has treasury and cash management tools as well as the expertise to help small businesses succeed. A cash-flow chart helps entrepreneurs detail the money coming in and out of the business on a daily, weekly and monthly basis and can include capital expenditures for a snapshot of the bigger financial picture.
A CPA can provide information on how key cash-flow drivers are performing, as well as insight on any developing negative trends. Standardized invoice and accounting processes help avoid disruption in cash flow and can speed payment.
Business owners must keep a fluid calculation of their break-even point to remain acutely aware of minimum sales goals, how they must price products and when expenses are on the trajectory to outpace profits.
Among the strategies business owners should put into place to optimize cash flow include the following:
Gross margins. Know the industry standard for pricing the products your business offers. Set costs at a level at which the business can be the most profitable, while still maintaining good customer flow. There’s a balance among price, demand and business affinity.
Send invoices immediately. If you’re not selling smaller retail items like coffee, you should strive to send invoices within 24 hours after a sale. This gives the customer ample time to process the paperwork for payment.
Early payment discounts. Incentivize customers to pay early by offering a small discount, such as 2 percent off the total if payment is received within 10 business days.
Business line of credit. A line of credit can be a temporary safety net when businesses experience a large gap in cash flow. Be aware, though, that the time to get that line of credit is before you really need it.
Cash reserves. The cash flow chart is the compass for determining cash reserves needed during slow periods. A reserve equivalent to six months of cash flow is recommended.
Accounts receivable financing. To offset the deficit from late payments, businesses may consider invoice factoring, also known as accounts receivable financing. This is a borrowing option that lets businesses convert the balance of invoices that are not due for another 30, 60 or 90 days into immediate cash.
Manage inventory levels. Too much inventory will use up available cash. Purchase as little inventory as possible but make arrangements for quick delivery of additional inventory when supplies get low. Consistently cycling out old inventory will help promote active cash flow, but manage discounts carefully because they ultimately cut into the profit margin.
Control debt. As businesses grow, owners can get ahead of themselves and create unmanageable debt. There are healthy ways to leverage debt, taking us back to the point of creating a cash flow chart and working with an experienced financial adviser.
For every question about managing cash flow, there is a solution. Business owners have access to proven tactics and a variety of resources that can help them build, operate and grow their business efficiently and successfully.
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Marcus Guinn is an executive vice president and loan manager at Arvest Bank in central Arkansas. Email him at MGuinn@Arvest.com. |