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Tips on How Small Businesses Can Manage Cash Flow Effectively

by BBB Staff | May 16, 2018 3:44:35 PM

A small business lives or dies based on its cash flow, which is the gap between when you're paid by your customers and when you have to pay your own bills from suppliers and vendors. If you can keep your cash flow under control, you're likely to thrive and grow. If not, your ability to grow — or even to keep your doors open — is severely hampered. Take a look at some useful tips on how to manage your cash flow effectively.

Prepare Cash Flow Projections

By tracking your anticipated cash flow for the coming quarter and year, you can be aware of any possible trouble in time to deal with it. A cash flow projection is just an educated guess as to your receivables and payables, but it provides a measurement, so you know at a glance if your cash flow isn't meeting expectations.

Manage Your Payables Carefully

As your company grows, you need to keep an eye not just on your expenses, but on how and when you pay your expenses. Don't pay bills early but pay electronically on the due date. That way, you keep the money in your account as long as possible while remaining in your vendors' good graces. If you should ever have to pay late due to an emergency, that history of on-time payment will stand you in good stead.

Sell Subscriptions Where Possible

While not every small business can reasonably sell subscriptions, the subscription model is one that's great for maintaining positive cash flow. When customers prepay for products or services, you have the cash you need to expand your business or see you through tough seasons.

Set Up Factoring When Appropriate

When you factor your receivables, you turn them over to a factor, which is a non-bank finance company, and in exchange, you receive up to 80 percent of the amount you're expecting. Factoring can be a reliable way to guarantee that you have cash on hand when you need it. However, factoring is more expensive than taking out a bank loan, so it may not be your first choice in seeking cash flow management solutions.

Renegotiate Your Fixed Debts

How much of your monthly outgo is dedicated to debt reduction? When you can reduce that number, your cash flow situation improves. Talk to your bank to see if you can renegotiate a lower interest rate, or try to extend the term of your loan (thereby lowering your monthly payments).

Pay Off Credit Cards

If you're running your business using credit cards, make sure you pay the bills every month before interest starts to accrue — because that compound interest can eat into your cash flow. And choose a credit card that gives you the kind of rewards you can use for airline travel, restaurant meals, or hotel rooms, to help keep that end of your cash flow under control.

Keep Some Cash on Hand

It can be tempting to throw all your profits back into more hiring, new equipment, whatever you need to expand. But every business undergoes cash shortfalls. Holding on to some cash can decrease the stress of those times so you can make wise decisions for the future. And keep that cash in interest-bearing accounts, so it can make money for you while it's just waiting around.

Follow Up on Your Receivables

When you're focused on running your business, it can be easy to let receivables slide — but you need those bills paid to keep your balance sheet in the black. Assign someone on your team to follow up with customers who fall behind on payment. You might also offer discounts to customers who pay early.

Leverage Tech to Stay on Top of Things

If you spend a lot of time out in the field or traveling around the country, it's all too easy to let questions about your finances pile up till you're back in the office. Take advantage of cloud-based technology to have your financial data available wherever you are.

Spread Out Your Payroll

Every time you process payroll, it costs you money. By cutting back on the frequency of your paydays, you can generate savings and help your cash flow. If paying on a monthly basis isn't going to work for you, consider paying twice a month rather than every other week (saving you two pay cycles a year). Using direct deposit in place of printing checks also cuts back on costs.

Financial flexibility can be the make-or-break factor for many small businesses. Strategically managing your cash flow helps you stay healthy and increases your options when you run into a lull.

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