Ask any small-business owner what business challenge he or she faces on a regular basis, and more times than not you'll get the answer "cash flow." Managing cash flow is a constant struggle for many business owners, and the success or failure of their businesses frequently rides on it.
According to a study by U.S. Bank, 82% of small businesses that fail do so because of poor cash flow management. Issues surrounding this include:
- No knowledge of pricing
- Lack of planning
- No knowledge of financing
- No experience in record-keeping
- Poor credit granting practices
- Inadequate borrowing practices
- Inadequate inventory
Although there is some comfort in knowing you’re not alone in fighting to keep your small business in the black, taking the steps to make it happen can sometimes feel quite daunting.
Get a Grip on Your Cash Flow
All these pitfalls relate specifically to cash flow. Cash flow isn't a difficult business topic, but many small-business owners don’t want to deal with it because they think it’s “all about numbers.” But it isn't. It’s about the health of your business.
Very simply, you need to make sure you have more cash coming in to your business than you do going out. You should know what your cash flow looks like and have the ability to change it when needed. So that means you need to understand what action to take to improve the situation.
There are two primary ways to improve the cash flow in your business.
Income: Increase the amount of cash coming in.
Expenses: Decrease the amount of cash going out.
Sounds like such an easy concept, doesn't it? But in practice, it can be a bit complicated. Let's look at some easy tips to help you get a better grip on your cash flow.
Increase the Amount of Cash Coming In
1. Raise your prices. This is one of the toughest things for small-business owners to do. Many fear that if they raise prices all the customers will stop buying from them. Luckily, that normally doesn't happen. Sure, you may lose a few customers but they would have walked away at some point anyway. You want customers who value what you sell and appreciate their relationship with your company. No small-business owner should strive to be the “low price leader.” It’s a losing proposition.
2. Change payment terms. If your business model is such that you do the work and then invoice to get paid, it’s time to shake that up. Set and enforce rules for getting paid within a shorter time frame. Most service providers allow 30-day payment terms. That’s a huge mistake. It often means you aren't getting paid until 45 or 60 days after your work is complete. Shorten your terms to five to 10 days, make sure you invoice right away, and put a due date on the invoice. Use an online invoicing service so you don’t have a time lag. You could also consider collecting partial payment at the start of the work, and the balance when it's complete. Always remember that you are not a bank. This is your business and you can set the rules any way you like.
3. Capitalize on your success. Find your two bestselling items, then examine what part of your target market is buying those items and concentrate your marketing efforts on selling more to that market. Many small-business owners are in the habit of coming up with new ideas or creating new things to sell. That’s not bad, but it often results in the products or services that are a success to get put on the back burner, when they could be bringing much needed cash into your business.
Decrease the Amount of Cash Going Out
4. Leverage payment practices. You want to stretch out paying your bills for as long as possible. Set up a schedule of payments for your current bills and don’t pay them until they are due. No need to put that cash in another business until it’s required. And if the company accepts credit cards, use them to pay your bill. That will give you another 20 to 30 days before the cash has to leave your business. Just make sure you manage it so you don’t incur fees and end up with long-standing debt.
5. Renegotiate fees with vendors. If you have recurring bills—think phone, Internet, office space and fees with other vendors—review each agreement and determine whether there’s a way to lower your regular payment. Things are always changing and, as technology improves, many services become less expensive. But nothing will change unless you ask.
6. Adjust inventory levels. If your business must keep inventory on hand, take a good look at your records to see if there are items that could be reduced or ordered less frequently. Inventory on hand just costs your business money. You might also want to consider if drop shipping would work for your business so you don’t have to manage inventory at all.
If you’re in a cash flow crunch, try some (or all) of these tips to help dig you out. This is by no means a comprehensive list of things you can do, but it will get you started.
I’d love to hear your ideas about making your cash flow better. Please share your thoughts in the comments below.
This article was originally published by Denise O’ Berry in the American Express Open forum.