Financial well-being June 11, 2024 By
Is your business busy but struggling to pay its bills? Small businesses of all types and sizes often encounter cash flow issues, especially as costs steadily rise and revenue streams fluctuate due to seasonality or economic conditions.
The good news is that you can put these best practices into action, even if you’re already in a cash flow crunch:
Track Your Inflow and Outflow
The first step to navigating a challenging liquidity situation is to understand exactly where your revenue comes from and how those funds are spent each month.
Start by using accounting software to generate cash flow statements, which break down cash inflow and outflow from operations, investments, and financing. For most small businesses, the operations section will be the most important to track.
Go back a few months – and then a few years – and try to identify meaningful patterns in the data. For instance, if your net cash from operations has remained stable but your receivables keep dropping, that could indicate you’re having trouble collecting payment from clients.
Trim Costs
Once you have greater insight into where your cash is going every month, you can look for areas where expenses can be reduced or eliminated.
Start with easy wins: Cancel any recurring subscriptions or services you’re not using anymore or that aren’t critical to keep your business operating.
Then, examine your necessary expenses to see if there’s any room for belt-tightening. You might be able to downsize or sublet part of your workspace, negotiate bulk discounts with key suppliers, or implement a few energy-saving hacks. For example, consider installing a smart thermostat that helps you manage your heating and cooling costs or replace standard lightbulbs with efficient LEDs.
Streamline Receivables
If you sell on credit, optimizing your policies and procedures to convert invoices into cash as quickly as possible while deterring bad debt is essential.
To promptly issue invoices, you can use a stand-alone online invoicing tool or integrated enterprise resource planning (ERP) software. Invoices are sent electronically to your clients, followed by automated reminders on a set cadence until payment is made.
Offering a variety of convenient payment methods, including card payment and automated clearing house (ACH) transfer, is helpful. Not only does this make it easy for your clients, but you can avoid the processing delays associated with paper checks.
You can also consider incentivizing early payments while penalizing late payments. For example, you might offer a 2% discount if clients pay within 10 days instead of 30 and a 2% fee for every month that payments are past due.
Get a Handle on Inventory
Overstocking and understocking can majorly impact your cash flow: Overstocking leads to wasted working capital, and understocking leads to lost sales.
You may have heard of just-in-time (JIT) systems, which are those that aim to responsively align stock levels with customer needs, reducing carrying costs and delays. This general principle can also be applied to service-based businesses if you consider personnel capacity your “inventory.”
Either way, your cash flow statements can provide valuable insights: You can calibrate supply by analyzing emerging demand trends. Say you’ve noticed that your cash receipts have declined in Q3 for the last three years – that might mean that you need to scale back on inventory in the summer.
Stretch Out Payables
To protect your credit profile and your reputation, avoid delinquency. However, you may be able to find ways to pay later without incurring penalties.
It may go against your intuition, but communicating proactively with creditors and suppliers is often better than trying to be “strong and silent.”
Take advantage of digital bill pay tools that allow you to schedule bill and loan payments beforehand. If your rent is due on the first of each month, set up a recurring transfer for that day so you maximize your cash reserves while skirting late fees.
Grow Revenue Responsibly
If you’re in a cash crunch, the key word here is responsible because expansion can be as much of a threat as an opportunity when you don’t have ample growth capital. Along the risk-reward continuum, you want to prioritize low-risk initiatives.
Rather than launching new products or expanding into new territories, find ways to cultivate your existing customer base through upselling, cross-selling, and personalization.
Enhancing your online presence – including your search engine business profiles and social media pages – can be a low-cost and highly effective way to boost brand awareness and engagement without overextending.
Also, look into no-cost or low-cost comarketing opportunities, like partnering with complementary businesses to create joint promotions. For example, a boutique clothing store could collaborate with a local beauty salon to offer a makeover package.
Consider Short-Term Financing
While You should try not to overleverage your business or personal assets or take on too much unsecured, high-interest debt, financing working capital can often be a wise solution.
One popular option is a business line of credit, which gives you access to funds as and when needed, with interest charged only on the amount you use. For shorter-term financing needs, consider a business credit card, which allows you to take advantage of the “float” – the period between when you make a purchase and when payment is due. With these seven steps, you can be well on your way to ensure your business is sustainable, no matter the season of economic shifts.
