By Danette Harkness
Senior Manager, Small Business Banking, Coast Capital Savings
What doesn’t kill you may make you stronger, but a negative cash flow will definitely kill your business. Cash flow is your business’ lifeblood, and understanding its behaviours can dictate whether you’ll make it or break it – so take control of your finances! Here are some tips to set you up for cash flow management success.
Give your dashboard some attention
Think of financial projections as a performance dashboard. It organizes and presents data in a way that offers clarity about where your business is headed, and the different terrains you may encounter. Financial projections can help you:
- Anticipate peaks and valleys so you can react appropriately. Make projections about expected cash inflows and outflows. Create a projected income statement and balance sheet. Understanding your cash flow’s behaviour ahead of time will allow you to make contingency plans to help get you through the ups and downs of the cash flow cycle.
- Establish a long-term plan so you can work effectively towards goals that may seem a long way down the road. Visualize the flashing yellow lights or potential roadblocks in your business roadmap, so you can find the most direct (and unobstructed) route to achieving your goals.
Reap what you’re owed
No one likes a bottleneck, unless you’re pouring wine through it. Eliminate any barriers that prevent you from generating the cash you need to address everyday business needs. For instance, you can improve your business’ cash flow cycle by collecting accounts receivable as quickly as possible.
The sooner you invoice your customer, the sooner you can expect to be paid. Encourage your customers to stay on top of their payments through incentives. Reward faster payers with discounts. For example, offer your customer a 1% discount for paying within 10 days. Otherwise, the bill is due in full in 30 days.
For the laggards, put your foot down and let them know you mean business. Charge late fees, or insist on partial or full payment upfront. And like any bad partner, don’t shy away from dumping customers that are weighing you and your business down.
Optimize your inventory
Your business is your (other) baby, so it’s only natural that you want all aspects of it to succeed. While it needs nurturing, holding on to every product or service you offer without considering the real value they bring your business can be harmful. Optimize your inventory by removing emotions from the decision-making equation. Identify which products and services are actually contributing to your overall cash flow, and do away with the ones that are exhausting your time, energy and resources.
Also, consider your supplier relationships. How reliable or responsive are they? Your suppliers should be able to adapt to fluctuations in consumer demand, including maintaining a sufficient buffer stock level so you can continue to deliver to your customers without skipping a beat.
Gain control over your expenses
While managing a positive cash flow might look and feel like effective financial management, don’t stop there. Monitor your business’ cash outflows so you can pinpoint warning signs early, and so you can spot opportunities to give yourself some cash flow elbow room.
If you’re entering into a long-term relationship with your supplier, now’s a good time to negotiate with them for better payment terms. They may be willing to accommodate your requests if it’s clear you’re committed to the partnership.
You may have to pay more to save more. Yes, you read that right. Although it sounds counterintuitive, make the first move and offer to pay more as a strategy to control your expenses. If you offer to pay 1% more, your supplier may let you pay your bill within 60 days instead of 30.
When it comes to expenses, you don’t have to go it alone. You can also incentivize your staff. Challenge your team to find ways to reduce expenses, and reward them if they’re successful. Beyond cutting expenses, you’ll foster a collaborative culture and encourage creative thinking.
Cash flow management is an essential skill for mompreneurs to develop. A basic understanding can help alleviate risk so your business can continue to survive and thrive.
For additional helpful tips for small business owners, visit Coast Capital Savings’ Small Business Tips