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5 Basic Cash Flow Rules Small Businesses Should Follow

by BBB Staff | Aug 28, 2018 12:13:15 PM

Finances are the foundation of every small business, regardless of product or industry. Money not only keeps the proverbial lights on, but it also represents a business owner's opportunities to change and grow their business. It also provides a safeguard against unexpected lulls in customer buying habits, which is why forward-thinking cash flow rules are essential - a smart business treats their money as a holistic asset to their goals, rather than a means to an end.

Basic Cash Flow Rule # 1 - Fund Thoughtfully, Not Opportunistically

While it's natural to be eager when it comes to initial funding or expansion funding of a small business, it's important to weigh total costs of your borrowing method - and that doesn't just mean a dollar value, either.

According to the Small Business Administration, the way you decide to fund your business could - and typically does - affect the way you structure and operate your business. For example, selecting a loan or line of credit with a high percentage rate, particularly if it’s a larger amount than you absolutely need, is essentially betting that your future sales will be enough to shoulder the burden. Even for an established business, that could be risky.

Be honest when discussing your true net income with lending and financial professionals, and always be conservative in your income estimates to avoid getting in over your head.

Basic Cash Flow Rule # 2 - Document, Document, Document

Even if you would never even dream of cheating on your taxes, sloppy paperwork might make it look like you're deliberately trying to. Establish good record-keeping habits, such as storing backup copies of daily receipts, on day one of operations. You'll need to ensure your employees are just as diligent in their habits, as well - one rogue cashier can throw a substantial wrench in the works. These records are helpful financially and operationally - having a running total of daily, weekly, or even seasonal receipts will help you plan your product ordering and staffing more accurately year-over-year.

Don't forget to document expenses, too - you'll save your accountant a huge headache and give yourself the best chance at claiming every deduction possible. (Hint: Phone apps such as CamScanner are an excellent tool for recording and saving cost receipts before they become lost or damaged.

Basic Cash Flow Rule # 3 - Don't Spend What You Don't Need To

It's a persistent myth that the best use of small business capital is buying new equipment - manufacturing machinery, computers, cash registers, and so on. In reality, depending on your needs and usage, used equipment rental and purchase programs work just as well and may be much more gentle on your budget. Used business materials ranging from desks and other furniture to large-scale workshop and kitchen equipment can be found at local outlets, auctions, and even unclaimed freight sales. Display counters and slat wall are often sold at pennies on the dollar by stores and retail chains going out of business, as well.

If you need services, consider teaming up with neighboring businesses to get a better rate on everything from parking lot repainting to carpet cleaning. Most service-oriented businesses will offer a discount for larger, consistent jobs and work harder to keep those large accounts.

Basic Cash Flow Rule # 4 - Fight for the Best Vendor Terms

While newer businesses might need to spend some time in pre-pay purgatory before a vendor is willing to discuss terms, it should always be a goal. Having an extra 15, 30, or even 90+ days to pay on an invoices means more time to earn capital using those materials or products. That means, instead of paying out of pocket, you can establish a cycle of paying out of the "register" instead - your business producing more capital than it needs to operate on a just-in-time basis. If you proactively pursue terms with your vendors, they can help guide your buying behaviors and discuss accurate term-roll out timelines with you.

Basic Cash Flow Rule # 5 - Don't Let Your Cash Be Lazy

There's a great deal of comfort in having a well-stocked bank account, but if your income isn't earning interest, it's lazy! Whenever possible, look for interest-bearing accounts to ensure you're getting the biggest bang for your literal buck between expenditures. Consider, if your products or services allow, setting up a membership plan or subscription package for your customers that requires a monthly payment. This approach will make it easy to divert a portion or the entirety of these stable sales into a secondary interest-bearing account for your business.

Your small business cash flow should always be as stable as possible, well-documented, protected, and earning for you whenever possible. You're busy making your business bigger and better - so use these five simple cash flow rules to make your money one less thing to worry about.

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