It’s not uncommon for every small business to struggle financially at one point or another. Financial troubles tend to happen, especially to new businesses on the market that aren’t experienced enough on how to avoid common pitfalls and financial mistakes.
The biggest issue small businesses experience is the cash flow problem. But why is cash so important? Simply put, cash is the most important and the most liquid asset a company can have. Its liquidity can help you make immediate payments or investments without any delays.
All other assets, such as inventory or property, for instance, need to be liquidated into cash, i.e. sold before you can do anything. That’s why every small business needs a positive cash flow. Cash flow is determined by calculating the amount of money flowing into your business or accounts receivable, as well as calculating the amount of money flowing out of your business or accounts payable.
If there’s more money coming in than out, you have a positive cash flow and vice versa. Now, needing a positive cash flow and actually getting there are two different things. Fortunately, with the right strategy in place, it shouldn’t be too difficult for small businesses to have a positive cash flow. That being said, here are a few ways you can ensure a positive cash flow for your small business.
Conduct a cash flow analysis
Before you go any further, you must assess your current financial health by conducting a cash flow analysis. With this analysis, you can calculate both accounts receivable and accounts payable, as well as determine the most common cash flow problems your small business is experiencing.
The main reason this is important is that by assessing your current cash flow status and your current problems, you can determine which strategy is best suited to improve the situation. You can then proceed to leverage various methods that will help you improve and ensure a positive cash flow for your small business.
Reducing the operational costs
One of the best ways, as well as the most difficult ones to ensure positive cash flow is reducing the operational costs. Operational costs are necessary expenses all businesses have that eventually yield a return on investment (ROI). For instance, operational costs include labour, marketing, manufacturing and so on.
Reducing these costs may be tricky because you don’t want to slow down production or sacrifice product and service quality. However, any major incidents or inconveniences can be avoided if you plan out your strategy the right way. As an example, you can reduce labor costs by outsourcing various business operations instead of hiring full-time departments.
This doesn’t necessarily have to be a permanent solution but it will help you manage cash flow for the time being. Another example is marketing. It’s no secret that a lot of businesses tend to overspend on marketing. Even though the more you invest, the better the results will be when marketing is concerned, there’s still a way to get viable results by making the most out of your resources instead of overspending them.
Reducing the overhead costs
The overhead costs are similar to operational ones, with the main difference being that they do not yield any ROI. In other words, they are a necessary money drain for your small business, and they need to be kept in check if you wish to have a positive cash flow.
For example, overhead costs include bills, taxes, rent, travel costs and so on and so forth. These costs are much more manageable than operational ones and can be reduced to a bare minimum to save money in the long-run. For instance, you can reduce energy bills by leveraging more sustainable technologies.
Also, you can save on additional fees by paying bills on time. In any event, reducing overhead costs improves your cash flow, so make sure you don’t overspend on services you don’t actually need or use, for that matter. Instead, keep only what’s important to ensure your business is operational.
Ensure cash reserves
It’s no secret that even though you manage to ensure a positive cash flow at some point, you won’t be able to maintain it at all times. In other words, sooner or later, you might hit a financial rough spot that may cause your cash flow to go into a negative.
In such cases, the best thing you can do is to have a cash reserve in an emergency savings account you don’t resort to unless you absolutely have to. Every business should allocate a small percentage of their profits to a cash reserve for rainy days.
The best time to regard cash reserves is when you consider your business funding in advance. If you resort to a reliable business funding guide, you’ll be able to secure enough funds for your business and have some left over for emergencies. Having a cash reserve is essential because you never know which unforeseen circumstance may throw you against the ropes, financially speaking.
Profits are not cash
One of the key elements of ensuring a positive cash flow for your small business is not making the mistake of believing that profits equal cash. The fact of the matter is that a company, no matter its size, can have positive revenue and profits and still go bankrupt because they lack the cash.
Here’s an example. Many small businesses leverage invoices as a convenient and resourceful payment method. You can sell a product and a customer has anywhere between 30 to 120 days to pay the invoice.
Now, a sale is a sale and it means revenue and profits. However, you still don’t have the cash from that sale. For the period between 30 to 120 days before the invoice is due, you have expenses to cover, such as salaries, bills, taxes and so on.
You can’t make those payments without cash so the only thing left to do is either seek alternative lending or declare bankruptcy. Therefore, cash is not the same as profit so make sure to have sufficient cash on hand to cover any emergencies.
In such cases, many employers consider applying for a personal loan to cover the necessary expenses before the invoices are due and to avoid bankruptcy. These types of short-term loans from alternative lenders are ideal in such situations, especially since it doesn’t take long to get approved for a loan and the payoff conditions are often more favourable than what banks have to offer. In other words, you can get your hands on cash fast even if you don’t have any in reserve.
Get paid on time
As previously mentioned, invoices are a convenient and resourceful payment method for your clients or customers but they can easily hurt your cash flow if you’re not careful enough. Even though your customers or clients are vital for your business, it’s also equally important to protect your business.
In other words, you have to ensure that you get paid on time and you mustn’t tolerate late or missed payments. Letting people off the hook for a couple of times is okay but don’t make it a habit.
What you should do is set automatic invoice payments and invoice reminders as well. If a client or customer refuses to pay but there isn’t a simple inconvenience involved, then don’t hesitate to penalize them or take them to court if need be.
On the other hand, if you wish to maintain a good relationship with customers or clients and avoid stepping on anyone’s toes, you don’t have to wait for them to pay. Instead, you can consider invoice factoring and get paid on time while a factoring company collects payments once invoices are due.
However, even invoice factoring may take some time, which can be inconvenient due to the fact that you have salaries to cover but no cash on-hand to do so, and employees aren’t too fond of waiting for a payday. That’s why many employers also consider payday loans as a means for taking care of employee needs first so that they can avoid any dissatisfaction among workers.
Cash is the most important financial factor for any business of any size. Without cash, you’re pretty much helpless regardless of how developed your company is, which means you might have to resort to going into unnecessary debt and similar activities just to ensure your business is afloat. That’s why it’s always better to ensure your small business favours a positive cash flow, as well as that it has cash reserves instead of risking financial problems.