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7 Fundamentals for Managing Your Small Business Cash Flow

One of the biggest challenges faced by small businesses, especially those actively trying to grow, is cash flow. Poorly managed cash flow can result in significant issues, and it is frequently listed as one of the biggest challenges for businesses. With small business failure rates at or above 50% in most developed countries and cash flow issues contributing to a large number of those failures, it’s important to keep an eye on it at all times.

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Below are seven tips to improve cash flow management and ensure your business remains healthy, regardless of your current profitability.

1. Build Strong Relationships with Customers

The first thing on the list is the most important and often the hardest to manage. Especially if you operate a receivables business or work with large corporations or government agencies, delays in payment can lead to serious cash flow issues.

Stronger relationships with your customers will help to better manage this. Specifically you can do the following:

Clear, consistent communication will often alleviate many of the most common problems related to receivables. Do the above and you’ll reduce your headaches significantly.

2. Negotiate Better Terms with Your Vendors

The sooner you have to pay your own bills, the harder it can be on your current cash flow. This is frequently the case for contractors and service businesses that need to purchase materials or hire subcontractors to complete a large project. While waiting for payment from their client, the subcontractors are expected or informed they will also need to wait.

There is risk in doing this, however. It can sour relationships with vendors or even result in late fees if you wait too long to pay. For this reason, negotiate better terms in advance for repayment. Net 60 or even Net 90 can be hugely beneficial in managing your cash flow concerns.

3. Have a Clear Collections and Late Fee Policy

On the other side of this, you have to be as strict as possible with your customers when it comes to on time payment. As much as you are trying to delay payment to your vendors, your customers are doing the same.

Negotiation of better terms is always an acceptable response to cash flow concerns, but non-payment or extremely late payment are not. That’s why you need a clear collections policy in place and a means to collect if someone is late. Make sure it is in writing, provided with the contract, and communicated to the customer frequently if you feel there may be an issue.

4. Optimize Inflow of Cash

Waiting on a handful of large payments throughout the year can be stressful and lead to potentially crippling situations if a company doesn’t pay or worse, closes and is unable to pay. To avoid this happening, diversify the inflow of cash for your business as much as possible.

There are many ways to do this. The easiest is to break down payment by your customers into smaller chunks – providing payment plans or offering installments will create more regular payments across your customer base to avoid those make-or-break deadlines. Another way to do this is to create new products.

Software companies have long since started shifting their business models to SaaS and ongoing support models because it results in monthly cash flow, often automated with credit card transactions. Service companies offer consulting and training to supplement their larger service contracts. Retailers sell insurance or replacement plans, and offer memberships with monthly or yearly fees for the recurring income and influx to their cash flow. Something similar can help offset delays in receivables.

5. Reduce Cash Outflow Where Possible

This is an easy one but often one that gets overlooked. Simply reducing your outflow can help improve the overall health of your business.

By reducing expenses, especially for large things like new equipment, monthly subscriptions, or ongoing payments, you can improve cash flow significantly. Also, streamlining large purchases and breaking them down with a line of credit will help you manage when the expenses are paid off, especially if you operate equipment vital to your business that might break down – like trucks, grills, or presses.

6. Receivables Funding Options

When there’s nothing to be done about slow or delayed receivables, there are funding options. These are particularly important for businesses that work with large companies or the government where delayed payment is the norm.

Factoring your invoices allows you to get paid faster, albeit for a fee. What is factoring? It’s when you sell your accounts receivable to a third party, who takes a percentage in commission or fees and provides the remainder to you up front, while waiting on full payment from your customer. By transferring the debt and the onus of collecting on that debt to a third party, you can maintain cash flow and focus on growing the business. This is especially important for companies that rely on a small number of very large contracts throughout the year.

7. Consider Fixed Deadlines for Certain Costs

By fixing the deadlines for payment of certain costs like sales tax remittance, payroll tax deposits, and unemployment tax, you can manage the outflow of cash from your business.

This allows you to better plan when expenses will be mandated and ensure invoices are collected by then or factored to cover the costs. What many consider to be a hindrance to their cash flow management can be a milestone for its measurement if carefully planned.

Ensuring Cash Flow Is Not an Ongoing Issue

While every small business faces and will continue to face this challenge, there are certain changes you can make to minimize its impact on your growth and allow you to maintain good relationships with your vendors, staff, and customers alike.

Use these seven tips to evaluate and improve the status of the actions you take to manage your cash flow and ensure this problem doesn’t have an outsized impact on how you run your business.