The day-to-day operations of your business will involve taking money in and spending it on expenses that keep you operating. This incoming and outgoing of money is called cash flow. Understanding and managing cash flow are two keys to the success of your company.
Cash Flow Analysis
The first step toward a healthy cash flow is taking a look at the numbers, so start with an analysis. A cash flow analysis statement lists all of your incoming and outgoing cash, putting all of the details in one place so you know what you’re dealing with.
The analysis covers three different aspects of your finances: operational activities (money resulting from your regular business operations), investment activities (stock sales, dividends, and the purchase of equipment or property), and financing activities (loans and lines of credit).
The incoming category includes how much you’re bringing in from selling your goods or services, loans, and available lines of credit. The outgoing side includes money spent on operating expenses, purchases and loan payments.
The amount of cash you have on hand after all the income and outgoing payments are tallied is called your free cash flow. Many experts consider the amount of free cash flow you have to be an even better reflection of your financial health than your earnings statement. If you’re consistently in the red (more money going out than coming in), it’s a good indication that you’re spending too much and/or not bringing in enough money to cover your expenses.
Strategies for Managing Cash Flow
Start with a budget. Using the information from your analysis, make a plan. Month by month, chart your expected income and outlays. Seeing it on paper will help you identify time periods when you might have a surplus and others where the might be a deficit.
Knowing that summers are slow, for example, will help you know to put money aside so that you’ll be able to make payroll and pay your rent. It will also give you advance notice if you might need to borrow money to tide you over, giving you time to make arrangements without having to resort to a quick-fix, very expensive loan.
Your predictions may not be perfect, but having an idea of what to expect will go a long way toward helping you plan and make adjustments if need be. If you spot a troubling trend, act to rectify the problem. Because cash flow is a function of in and out, there are really only two things you can do: take in more or spend less.
Ten Ways to Bring in More Cash
1. Invoice promptly. If your business collects payment through invoices, stay on top of them. The money won’t come in until the invoices go out, so don’t put it off. It may even pay for you to hire someone to do this for you. The small outlay could pay big dividends as money starts rolling in on a more regular basis. You might also consider offering discounts to quick payers as an incentive.
Also, be sure to stay on top of your receivables. Collect what is due when it is due, and don’t let things slide. Send out late notices; call and work to ensure you’re paid for the work you’ve done or the goods you’ve delivered. You can be friendly but firm.
2. Sell more. Take a look at your sales efforts and your marketing plan. What can you tweak to bring in more money in sales? Hiring a salesperson might cost money in the short term, but you’re likely to make more money in the long run, especially if you can pay on commission.
3. Sell an asset. Don’t offload an asset you need for your business to be successful, but don’t hold onto things you don’t use or need. Understand, however, that this will be a one-time cash infusion, so if your problems are ongoing, it will only help to tide you over, without being a long-term solution.
4. Raise your prices. Raise your pricing, especially if you’ve been around for a while with no increases. It’s scary, but necessary. Figure out how many clients you can afford to lose. Depending on your business model, it’s possible that when you raise prices, you’ll make more money doing less work.
5. Work on retainer. If you’re in a service business, consider setting up a retainer to deal with clients. You’ll make the same amount each month, which will make your cash flow more even and budgeting easier. Just be sure to negotiate a clear understanding of what’s expected so your time and resources aren’t exploited.
6. Get paid up front. This won’t work in every type of business, but it’s worth a shot. At the very least, perhaps you can have your labor and materials paid for in advance.
7. Accept credit and debit cards for payment. They’re not just for retailers, either! The transaction fees will cost you a few percentage points, but you’ll have the money in the bank within a couple of days instead of waiting thirty, sixty or more days between invoicing and depositing a check. If customers will pay you at the time of service, you’ll also cut down on the cost of billing them. Remember to shop around for merchant service fees, as they vary.
8. Sell your receivables. There are companies that will buy your outstanding invoices for cash on the spot. Only consider selling your receivables if you’re struggling with a temporary problem that has a clear end in sight. You will have to sell your income at a discount, but you’ll see a short-term increase in cash flow. Make sure to balance your present need with how much you’ll give up by getting paid less than you otherwise would have.
9. Get a loan. There may be times when you’ll need an influx of cash to tide you over. As a small business, your options might be limited, but there are reputable organizations like Accion that specialize in making small loans to growing businesses. Alternately, a local credit union may help you arrange a line of credit for those periods when the money coming in isn’t enough to cover what’s going out.
10. Bring in a partner or investor. This can be a relatively costly way to increase cash flow, but for some businesses, a partner or other investors can provide a benefit. Always work with an attorney to help negotiate the terms of your agreement.
Three Ways to Spend Less Cash
1. Cut costs. Your analysis will be very helpful here. Look over all the things you’re spending money on and see where you can cut back. Do you need that high-profile office space or can you do just as well at a less fancy address? Are you paying for perks above and beyond what would be expected of even a generous employer? Can you find a different supplier with lower prices? Consider where you might cut back without hurting quality, productivity or morale.
2. Pay slower. You will have to pay eventually, of course, but one way to hold on to more cash when you’re in a bind is to spend it more slowly. Don’t jeopardize your relationships, but depending on the specifics of your situation, it might make sense to take a small interest rate penalty if you can make better use of the cash right now. Do NOT use this method for credit card bills or any type of loan, as the fees may outweigh the benefits; plus late payments can adversely affect your credit rating, which can be far more costly to you in the long run.
3. Cut down on inventory. Managing your inventory is crucial. Having too little on hand could hamper you from selling as much as you could, but having too much carries its own problems. All that money tied up in inventory is money that isn’t working for you, so consider discounting your older or slower-selling products to give yourself some operating capital.
There may be times when you pay out more money than you take in, but with good cash management, you can plan and compensate for that so your business can continue to grow and thrive. Simply put, companies with positive cash flow (more cash coming in than going out) are able to invest it back into the business in order to generate more cash and profit, increasing their chances for success.