•  A smart pig on a stack of books
  • Take control of your cash flow


    A business' cash flow is what keeps it afloat. Cash flow is composed of cash coming in and going out, inventory, accounts payable, accounts receivable, debt and capital expenditures. Knowing your cash flow well and having a handle on it is crucial for a business' success. However, this is something that not all first-time business owners pick up right away.

    When cash flow problems occur, they can have some devastating consequences. They might mean the business has to pay bills late, which will cost more, or they have to delay employees' paychecks, which can lower morale. In extreme cases, a business might even go bankrupt, even though, on paper, it should be successful, Inc. Magazine explained [1].

    "Despite the fact that cash is the lifeblood of a business -- the fuel that keeps the engine running -- most business owners don't truly have a handle on their cash flow," Philip Campbell, a CPA who has experience being a chief financial officer for several companies, explained to Inc. Magazine. "Poor cash-flow management is causing more business failures today than ever before."

    Problems with cash flow might come out of the blue, or a business owner might have seen them coming but didn't know how to prevent it. The good news is, it is possible to prepare for cash flow problems.

    Seek financing
    While some entrepreneurs might stay away from loans and financing options because it seems like an unnecessary expense when cash flow is going well, it might be more beneficial than they think. Entrepreneur explained that Shegar Thirumalai, the owner of a security company in San Diego, sought working capital financing before he even foresaw a need for it.

    "Even if I don't need it now, I will always have a reserve," Thirumalai explained. "It's worth it, even if you have to pay a little interest."

    Having the money set aside for when it's needed can provide peace of mind to the entrepreneur when the cash flow begins to waver.

    Inc. Magazine also pointed out that loans can bridge the gap between a slow period and the next influx of cash. There are several different types of loans businesses can use. Revolving lines of credit and equity loans are two of the common ones.

    Be selective
    It might be tempting to give the majority of your customers credit, especially in the beginning when you're trying to establish a client base. But this is not a smart business move. Intuit, the developer of the Quickbooks accounting software, explained it's important to establish clear guidelines about who will qualify for credit, and to be as strict as possible in following them [3].

    Inc. Magazine suggested requiring a credit application and a Dun & Bradstreet report before deciding whether someone is creditworthy. Or, allowing them to use credit cards for purchases can help reduce the amount of lost revenue or late payments. Though it will cost you a percentage of the sale, it might be worth it.

    Encourage quicker payments
    A quick fix to a cash flow problem is to collect payments faster. However, taking control of your clients' payment schedules can be tricky. Entrepreneur suggested offering a discount to customers who pay within a week or 10 days after receiving an invoice. This will encourage some to pay up faster.

    Inc. Magazine pointed out this system comes with a downside: it could affect your profit margin. However, getting the money you need in the timeframe you need it might be more valuable than the actual dollar amount received.

    QuickBooks suggested trying other incentives to boost sales and bring in more money faster. These could include:

    • A member appreciation day
    • A discount day
    • A publicity tour with your employees to encourage people to come into your store
    • Offering referral incentives
    • Hosting a contest

    Bringing on new customers is essential to growth, but Inc. Magazine pointed out this isn't always the most effective venture. If you are trying to mend a cash flow problem, instead of trying to convert more customers, attempt upselling current ones. This is more cost-effective, as it doesn't involve additional marketing or prospective calls. Do this by analyzing their current purchase habits and find out why they are purchasing what they are. Use this information to bring their attention to another product they may find valuable.

    However, when using this method, be sure to keep a close eye on your cash flow. While it'll likely help in the long run, this might only increase accounts receivables if customers are buying on credit only.

    A business' cash flow is one of the most critical aspects an entrepreneur needs to have a handle on, especially when first starting out. By having a good idea of how to properly manage it, the entrepreneur will be able to spend more time with customers and employees than trying to determine how to pay employees amidst a slow cash flow period.

    [1]. How To Manage Cash Flow
    [2]. 3 Rules About Cash Flow That First-Time Business Owners Need to Know
    [3]. 10 Tips for Better Managing Cash Flow

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