Business owners often underestimate their needs by assuming cash will come in sooner or that bills are going to come in later.
Cash flow is the lifeblood of any business, but especially so for smaller operations—it’s what keeps the doors open. We see cash flow as fuel for your business. If you run out of fuel, you’re not going anywhere. Cash flow is essential for growth. There’s not a single business that has been able to grow without it.
Yet, as integral as cash flow is to success, many small business owners mishandle this aspect of their operations—a mistake that puts businesses at serious risk. Owners often underestimate needs by assuming cash will come in sooner than it actually does or that bills are going to come in later than they do. It’s also common for owners to not properly manage their line of credit or access to loans. It’s often better to take advantage of credit with low-interest rates when it’s not needed, rather than seek it when you’re up against a time-sensitive situation. Another concern is confusing cash flow with profitability. People think if they made a sale and that it’s profitable, then everything is great. But what they really should be looking at is the cash flow behind the sale.
When it comes to cash flow, timing is everything. You might make a nice profit on a particular contract, but what if that contract doesn’t pay until 90 days after the work is completed? How are you going to pay your bills in the meantime? If you’re not careful, small mistakes can wipe out your profits.
As you evaluate your strategy, be sure to:
- Consider how much cash is coming in. Create a simple cash flow model to illustrate when cash is coming in and when bills are due. Prepare this weekly. Remember, there will always be a percentage of accounts receivables that come in late.
- Take advantage of the credit. Get situated credit-wise before you need it.
- Examine cash flow before you hire. Never hire ahead of cash flow.
- Incentivize customers to pay on time. Offer lower pricing if customers pay on delivery, and add a surcharge if they want to pay later.
Managing cash flow takes awareness, organization, and preparedness. But if you’re caught off guard and you think there’s going to be a cash flow problem, don’t automatically take out a loan. Evaluate if there are other strategies you can deploy first. Negotiating with vendors. For example, if you’ve been paying upon delivery, see if they’ll allow you to pay in 30 days. Additionally, if cash flow is becoming a chronic issue, take a look at your pricing—it may be too low.
Above all, don’t let cash flow cause repeated panic, and use it as a starting point to control what you can and prepare for the unknown. When small business owners get intimidated, they tend to ignore what’s intimidating them. But ignoring cash flow could do you in. A business could actually be on a path to growth and they could still have to shut their doors because they didn’t manage their cash flow.