Eighty-two percent of businesses fail due to poor cash-flow management, according to a study by Jessie Hagen of US Bank, cited on the SCORE website.
The most common cash flow contributors for small business failure include unexpected growth, insufficient capital, poor inventory management, lack of available credit to manage cash flow, and comingling of business and personal funds, according to the National Association of Women Business Owners (NAWBO).
Planning is the key to successful cash flow management. Here are five valuable practices for small business owners to assist with establishing a healthy cash flow.
1. Get paid ASAP. Leveraging electronic payment options is an excellent strategy to get paid faster as they are processed more quickly than standard transactions. There are a variety of options for online payments: same-day funding with merchant services, ACH payments, wire transfers, electronic check scanner for larger checks, or mobile check deposits for smaller items – all easily managed from your office or online. If you can be paid in advance or at point-of-sale, do so; otherwise, invoice often, secure deposits, provide incentives for early payments, and tightly manage receivables.
2. Never be short on cash. Establishing a line of credit to cover cash flow gaps or shortfalls, caused from timing differences between payables and receivables, seasonality, or short-term cash needs (less than one year). There is no cash advance fee when leveraging a line of credit – think of it as ready cash to meet immediate cash needs.
3. Delay cash outflows. Try using a small business line of credit as a cash flow tool, providing a typically lower cost alternative to other forms of credit. Also, a small business owner can set up extended payment terms with vendors/suppliers, and leverage electronic payments to control cash disbursements. If you can’t delay payments, attempt to negotiate payment discounts for early payments to create a positive margin. For day-to-day expenses such as office supplies or gas, a small business credit card is a great solution because it provides a grace period on interest up to 30-45 days and may even pay you cash or rewards in the process. Look for a small business card without an annual fee.
4. Hold onto your cash. Leverage today’s low-cost, long-term financing to purchase and/or refinance assets, such as commercial vehicles, equipment, and commercial real estate, as this could help your business sustain needed liquidity. Securing a long-term low rate today could mean rate protection for the future, which can help you secure low monthly payments for improved cash flow and budgeting.
5. Pay yourself, not a landlord. Buying instead of leasing owner-occupied commercial real estate can help stabilize payments, protect against rent increases, build equity, and create an asset that can be sold, borrowed against, or leased to third parties. If you work from home, consider a residential home mortgage loan. Many small business owners are surprised to learn that purchasing can often be more affordable than renting or leasing.
Simple strategies can create big wins. By maintaining a mindset that cash is king, and exercising strategies to maximize cash flow, small business owners are better prepared to manage growth, change, and unexpected surprises, as well as take advantage of new opportunities as they arise. Meeting with a small business banker can help you evaluate your business priorities, including your cash flow needs, and identify the right financial tools to help your business succeed.
As Senior Vice President, Small Business National Credit Performance Manager, Karen Harrison is responsible for delivering credit solutions to priority small business clients across the United States, while also ensuring clients benefit from the full franchise value of Bank of America/Merrill Lynch. In this capacity, she manages a national team of credit performance managers, serving more than 3 million small business clients nationwide.
Karen is actively engaged in the community and is a recipient of the Global Diversity and Inclusion award at Bank of America. She currently serves as the Executive Sponsor for Bank of America Community Volunteers/San Diego Market, Chairman of LEAD for Women, San Diego Chapter, as well as serves on the Board of Directors for LEAD San Diego, Junior Achievement and the National Association of Women Business Owners (NAWBO), San Diego Chapter, the Women’s Leadership Council for the United Way, and the California’s Women Leaders Network at Bank of America. She is a former Big Sister for Big Brothers/Big Sisters of America. An honors graduate, Karen holds an MBA from the University of Phoenix and a BA from California State University, Fresno. Karen is married, resides in San Diego, California, and has eight Godchildren.
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