Cash flow kills one in every four small businesses.
You read that correctly.
Twenty-five percent of small businesses end up closing shop because they weren’t able to manage their cash flow correctly.
This phenomenon is so widespread, yet rarely understood. Even a seemingly healthy business that is turning a steady profit could be at risk of bankruptcy if you don’t manage cash effectively.
Remember that invoice you sent out last month but still haven’t been paid for? What about that company that promised to pay you before going bankrupt? And was that office upgrade really necessary?
It may be that you are ready to deliver 1,000 units of your amazing product by December. But it’s May now, and you need to buy the materials and the labor to deliver that product. What do you do in the meantime?
These are all common questions small business owners face each and every day. Unfortunately, situations like these quickly add up, giving you what the accounting people call a cash flow problem.
Managing cash flow is an absolutely essential aspect of running a successful business. Not only does it keep your business liquid, it gives you access to enough cash to meet your ongoing needs. This ensures your business can keep growing steadily over time.
Below are five ways you can improve your cash flow before it becomes a problem.
1. Automate your account receivable
Small business owners may be great at what they do, but this doesn’t always translate into good accounting practices. It’s hard to know how much money you truly have on hand if you don’t know what’s coming in and going out.
Keeping an organized ledger of your business is necessary for managing cash flow. This will also help you speed up bill collection.
The good news is there are ways you can automate your back-end to maximize accounts receivable and get paid on time. To learn more about automation, read: Ten Ways to Automate Your Small Business for Maximum Efficiency. There’s a few resources on this page that can help you automate your entire accounting system.
2. Secure credit before you actually need it
In today’s economy, access to credit can make or break your business. The sooner you prepare your funding options, the less scrambling you’ll have to do later when cash flow becomes a problem.
That’s why it’s important to talk to a financing or credit professional as soon as possible. Even if you haven’t opened your business yet, gaining clarity on your financing options is a good first step.
In addition to securing future credit, don’t be afraid to put existing credit to work for you. This could be a business credit card or line of credit.
Red Door Capital Group offers cash flow financing solutions for all types of businesses. Even if you don’t need funds today, speaking with us can help you plan for your future.
3. Keep overhead low
It would be easy to suggest that you choose a lower-overhead business, but this isn’t always possible. But there are practical steps you can take to minimize your overhead costs as much as possible, especially in the startup phase. Most new enterprises don’t need massive office space or a large warehouse for inventory. Scaling up costs should only be accompanied by an equal or greater rise in revenue.
Business success is all about staying cash flow positive. Minimizing overhead costs is one of the best ways of doing so.
4. Always keep a cushion on hand
One of the best ways to stay cash flow positive is to keep a cushion of cash available for a rainy day. When you’re just starting out, your business will experience plenty of hiccups as you scale up and get your invoicing on track.
Savings, combined with access to steady credit, can ensure you stay out of a zero-account balance. After all, you don’t want one slow sales month to cost you your business. This happens all too often for businesses that are just barely keeping their head above water.
5. Realize that everything is an opportunity, or an opportunity cost
It’s easy to get excited at a new business prospect. But this doesn’t mean you should always take it, especially when your business is young and vulnerable.
If you’re a professional service business, realize that every hour you spend on a client is a loss of potential gain from other alternatives. The same holds true for retailers and other businesses; the amount of effort you put in to one activity necessarily takes you away from other, alternative activities.
If you’re a big firm with lots of resources, you can afford to take lower paying or slow-paying clients. This isn’t always possible when you’re just starting out.
In other words, don’t be afraid to say no if a particular opportunity doesn’t suit you. Not every sale is worth your effort, so choose carefully.
Being too passive about past-due receivables is a problem many new entrepreneurs face. You may feel apprehensive about asking your client to get paid, but doing so is just good business practice.
Timely payment collection is crucial at the startup phase. Keep in mind that every missed payment is a potential cash flow problem down the road. To help mitigate any cash flow issues you have, seek out quality financing solutions that can help you get through the tough times. That’s where Red Door comes to the rescue.
The following article has additional resources to help you solve cash flow problems. In particular, it helps business owners deal with:
- Slow-paying invoices;
- Disorganized books;
- High expenses;
- Bad debts;
- Profit problems; and
- Expansion issues
Are you looking to expand? Red Door Capital Group helps you avoid the Catch-22 that is normally associated with business expansion. We handle most of the work for you and eliminate all of the unknowns from your growth strategy. Check out our Growth & Expansion solutions to learn more.
Elaine Pofeldt (May 19, 2015). “5 Ways to Tackle the Problem That Kills One of Every Four Small Businesses.” Time.
Jared Hecht (September 25, 2015). “The 5 Worst Cash-Flow Mistakes Small-Business Owners Make.” Entrepreneur.