According to the Small Business Administration (SBA), 50% of all small and medium-sized businesses fail within their first four years and nearly 96% dissolve by the tenth year. And the most common reason for the high failure rate is poor cash flow management.
Cash flow is the lifeblood of any business. Buy supplies, paying employees, making infrastructure investments, marketing your products/services, and growing your business takes a steady, reliable flow of cash and requires a special set of cash flow management knowledge that most startup business owners simply don’t have.
The following are five proven strategies you can start implementing today to improve your small business cash flow.
Cash Flow Management Tip #1: Plan for future cash flow needs
There is nothing more frustrating than trying to find cash when you desperately need it. To avoid such situations, keep accurate and timely accounting records and use them to understand and plan for all future needs. If you have a solid plan for the next six months, you’ll rarely get stranded.
Cash Flow Management Tip #2: Build relationships with lenders
Lenders seldom give loans to distraught businesses. So, don’t wait until you’re desperate before approaching your local bank. Begin building the relationship today when your business is doing well. Additionally, invest in your accounts receivable, inventory, and equipment as those are the three factors that will convince the lender to give you a loan.
If slow-paying customers are making it impossible to acquire funding from a traditional source, you might consider using a factoring company to help improve your small business cash flow.
Cash Flow Management Tip #3: Keep your cash working
Every dollar you have should be deposited in an interest-earning account. If you can get high-interest rate accounts, that’s even better. Avoid long-term certificates of deposit (CDs) however as they lock your cash away for a long time and redeeming early will cost you.
Cash Flow Management Tip #4: Find ways to collect payments faster
Ideally, you should collect payment on delivery. But that’s not always possible. Still, you can take steps to speed up payments. For instance, invoice customers on the day you deliver, state your payment terms on the invoice, charge a reasonable amount of interest on payments later than 30 days, and follow up promptly.
Cash Flow Management Tip #5: Maximize cash inflow while minimizing outflow
There are a number of ways to increase cash inflow. You can demand a 50% security deposit for all orders, consider subscription sales, and use layaway programs. To minimize cash outflow; consider repairing before replacing equipment, buy used instead of new equipment, delay product upgrades, and considering bartering for with vendors for supplies and services.