5 ways to bridge the cash flow gap as a small business
A positive cash flow is critical to the operation and success of your business, and is a key indicator of a healthy, well-run company. As you’re focusing on launching your dream into a reality, maintaining a positive cash flow can be difficult. Achieving a positive cash flow doesn’t just happen; it takes careful planning, hard work and thoughtful decision making.
There’s a lot to consider: Is your business seasonal? Is your payment cycle in sync with your collection cycle? What is your average cost of sale? Are you managing your assets and inventory properly by purchasing only what you need, when you need it? In order to keep your finances running smoothly, you'll need to constantly evaluate all of these things and be prepared to change your practices as necessary.
Here are 5 areas of focus to help get you started.
1. Keep a close eye on cash flow
The most important factor in cash flow management is tracking it closely. If you’re in the dark, you’re likely to run into unforeseen issues. There are many useful tools to make this a seamless experience, like accounting software tool Quickbooks. You can also find free resources online or create your own cash flow spreadsheet. Keeping track of important metrics, and other factors (like how much inventory do you need to hold, how many invoices are overdue, how much cash is tied up in work in progress) will all help you figure out your ‘break even’ point, and allow you to take steps toward achieving a positive cash flow position.
2. Maintain some cash reserves
Every business will have cash shortfalls. It’ll be easier to sleep at night knowing you have a security net of some kind. Putting some cash aside for the slower business times will allow you to focus on increasing sales, and maximizing your current initiatives. Financial experts generally say that a solid reserve is one that can take care of anywhere from three to six months of the company’s expenses. If you’ve been successful tracking and managing your cash flow it will be easy to determine how much you need to put aside.
3. Know when to lease and know when to buy
Part of keeping a positive cash flow is keeping business expenses low. All businesses have a need for equipment, technology, and facilities to some capacity and these things require capital. You may want to consider leasing equipment and renting retail or office space, particularly in your early stages.This will put you in a position to eliminate larger portions of capital being tied up in these items.
4. Boost sales with incentives and promotions
During times when you require more capital, you can consider increasing your sales in a variety of ways. You might offer referral incentives to your customers, create a customer appreciation event, or a seasonal sale.
Depending on what type of business you’re running, you can incentivize early payments and penalize late payments. If you’re a business that relies on invoicing to get paid, this can be a great way to immediately improve cash flow.
5. Be prepared with a business line of credit or operating loan
Even if you’ve put aside a cash reserve, you may want to consider a business line of credit or an operating loan. Getting a line of credit before you even need it can be a good insurance policy against future cash flow problems.
There are also financing options available that can help you maintain a positive cash flow. Operating loans can help you cover your regular costs in advance of collecting receivables to pay them. The lender will use a percentage of your accounts receivable as collateral against an operating loan. Operating loans are not one-time loans, but are set up with a lender as a series of pre-approved, short-term loans with a maximum limit, saving you the hassle of having to constantly negotiate new terms. Many new businesses require operating loans, but as your business grows, you'll ideally be able to operate without them.
Remember that Sunshine Coast Credit Union is here with advice to help your business grow from a start-up to a self-sufficient operation.
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