For many businesses, the trouble isn’t with getting people to buy their products, or hiring great talent, or problems with leadership. They’re instead faced with a simple but devastating issue: cash flow management.
In fact, one study found that cash flow management problems were the primary reason why small businesses fail.
Your cash flow is the money that goes in and out of your business bank account on a day-to-day basis. You take in money from your customers, and send it back out to pay your bills and suppliers. What’s left over could be your profit—if an unexpected expense doesn’t arise and wipe your coffers clean.
For small and home-based businesses, managing this flow should be a simple process, given minimal overhead compared to bigger companies.
But cash flow can be variable for any kind of business, especially in the beginning stages. As you continue to make investments, innovate, and find what works for your business, your cash flow may fluctuate. And it’s those unexpected fluctuations that can sink your business, even if your products are in high demand.
With that in mind, let’s review nine ways to even out your cash flow, in order to stay in business for the long haul.
Use a business credit card for small purchases
A business credit card is one of the best financial tools a small business owner has at their disposal. The best business credit cards not only give you an extension on paying off purchases, but they provide purchase protection, rack up reward points and perks you can reinvest into your business, and help improve your business credit score.
Of course, you can’t pay for everything with your credit card. But give yourself an extended payment cycle on all of your small purchases—office equipment, supplies, etc.—and you’ll have more cash on hand to pay for the bigger stuff.
Plus, the best business credit cards sometimes come with a 0% introductory APR, which essentially means a no-interest loan for the life of the offer. That’s a deal that no other business financing option can touch.
Open up a business line of credit
Perhaps the most flexible financing tool available to business owners is the business line of credit. LOCs function similarly to credit cards: The lender gives you access to a pool of money that you can draw on at any time, and you only pay for the amount that you draw.
LOCs come in handy when you are facing a cash flow gap and need to make up the difference right away. If you have a line in your back pocket, you can dip into it to cover payroll, or to take advantage of a sale on inventory, without jeopardizing your other needs.
Move to subscription payment models
Businesses use subscription payment models for a reason: They are consistent. You might be able to get more from a customer on a purchase-by-purchase basis, but by locking them into a monthly automatic withdrawal, you gain the peace of mind that comes with consistency.
Offer your customers a discount if they agree to a monthly subscription service. Meanwhile, see if you can also switch to a subscription model with your own vendors and suppliers, so you know how much money you’ll owe them (and when you’ll pay them) each month, quarter, and year.
Collect your receivables as soon as possible
Some businesses allow their customers and clients to pay them on a net-30 or net-60 schedule, meaning payment isn’t due until 30 or 60 days, respectively, after the invoice is issued. Your goal should be to shorten your payment period so you get paid as quickly as possible—in the best case scenario, immediately upon purchase.
Ask for deposits on large orders
If you are willing to extend payment windows to your customers, don’t leave yourself high and dry on large orders. Tell customers you require a deposit—as much as 50%—on large orders that will take time to fill. Otherwise, you will commit time and resources to a massive project without any guarantee that you will actually get paid.
Offer discounts to those who pay quickly
This is another option for those who give their customers 30 days or more to pay an invoice. Tell customers that you’re willing to offer them a slight discount in exchange for their immediate payment. While you’ll have to give up a small piece of what you’re owed, the quick access to your funds is worth it.
Look into invoice financing or factoring
This is another form of financing that essentially gives you quicker access to the money you’re owed in exchange for a small percentage. Some lenders will “finance” your loan by lending you money against what you’re owed. You then pay the lender back a small fee that increases with every week that your funds are unpaid, until the transaction is complete.
Invoice factoring is a little different: You sell the invoice to a third party, which then takes over responsibility for collecting the debt. Their cut will be a little bigger as a result, but on the other hand, you won’t have to commit time and money towards recouping what you’re owed any longer.
Put off your payables as long as possible
If your vendors and suppliers grant you payment windows of net-60, for example, don’t feel the need to get on their good side (unless you want to) by paying right away. Wait as long as possible, within their payment window, to send funds out of your bank account.
Remember to pay your quarterly taxes
New small business owners who act as their own bookkeeper and accountant are sometimes surprised to learn about quarterly taxes. When you’re self-employed, you need to send in estimated tax payments each quarter—rather than all at once in April—and failing to do so can result in penalties.
There is another benefit to quarterly taxes: You won’t be surprised by a massive tax bill once a year if you put aside funds for tax payments every few months. Cash flow management is all about balance and consistency, so put yourself in the driver’s seat of what you owe by making similar estimated payments each quarter. Then, you can pay off the rest in April of the following year if you find that you were a little short.
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Good cash flow management stems from minimizing your costs while maximizing your revenue. It also requires careful planning, so you aren’t spending money this week that you won’t have in hand until the next. Take the time to look over your financial responsibilities each month, and outline how you can best use your revenue to pay off your costs, so you can boost your profits and keep your business going.
