Is your small business raking in the big bucks on paper—while you struggle to pay your bills on time because your bank account is constantly running low? Cash flow problems are one of the biggest challenges small business owners face. More than 80 percent of small businesses fail because of cash flow problems, Small Business Trends reports. Here’s how to prevent your business from meeting that fate.
Curious what the second big problem small business owners struggle with is? Check it out here.
What is cash flow?
Positive cash flow means you have more money coming into your business than going out. Negative cash flow means you’re spending more than you are bringing in. (Think of it as being overdrawn on your checking account.)
Cash flow problems can easily happen—even in successful businesses. A growing company may need to buy inventory or hire additional employees to keep pace with demand for products or services. But what happens if those customers don’t pay you for 60 days, 90 days, or more—as is common with many corporate or government clients? If you have to meet payroll every month or pay off your inventory in 30 days, you’re in trouble.
According to an analysis of 20 million invoices conducted a few years ago by Fundbox*, 64 percent of small businesses are affected by late payments.
How to manage your cash flow
When you’re having cash flow problems, your instinct may be to hide your head in the sand. Don’t. Use your accounting app (like QuickBooks or FreshBooks) to create cash flow statements and review them at least monthly. If you’re struggling with cash flow, or you’re going through a busy time, review your cash flow statement weekly or even daily.
Learn more about Account Management from Bank of America
Reviewing your cash flow statements and developing a cash flow forecast can prevent unpleasant surprises. Use your past cash flow statements and your sales forecasts to understand what your cash flow landscape might look like six or 12 months in the future. Having a roadmap of what to expect helps you budget more accurately.
Fast or slow?
In general, your goal is to get paid as quickly as possible, while delaying your payments as long as possible in order to keep cash in your accounts longer. Here are some tips for doing so:
- Invoice right away. As soon as the product is delivered or the service is performed, send out your invoice.
- Contact the customer as soon as a payment is late. Use your accounting app to alert you of past-due payments.
- Automate your own payments so you can pay your bills as late as possible without concern about missing a due date.
- Use business credit cards to pay your bills when possible.
- Offer your customers discounts for early payment (make sure this doesn't negatively affect margins).
- Request a deposit before beginning a job, and/or stagger periodic payments throughout a long project.
- Once you’ve developed a good track record with vendors and suppliers, see if you can negotiate longer payment terms or adjust your payment due dates so you don’t have too many bills due at once.
Prevent cash flow problems
To keep cash flow problems from cramping your style, always conduct credit checks before you extend credit to a new customer. If you have any concerns about a customer’s ability to pay but still want to work with them, work out a plan such as monthly payments or COD to ensure you’ll be paid for your work.
Finally, have a backup plan. When your business is doing well financially, apply for a business line of credit that you can use in case of emergency. Obtaining a couple of business credit cards will help as well. This way, you have some options for financing if you get into a cash flow crunch.
Find the right financing for your business
*Disclosure: Fundbox is a client of my company.
Rieva Lesonsky is CEO and Co-founder of GrowBiz Media, a custom content and media company focusing on small business and entrepreneurship, and the blog SmallBizDaily.com. A nationally known speaker and authority on entrepreneurship, Rieva has been covering America’s entrepreneurs for more than 30 years. Before co-founding GrowBiz Media, Lesonsky was the long-time Editorial Director of Entrepreneur Magazine. Lesonsky has appeared on hundreds of radio shows and numerous local and national television programs, including the Today Show, Good Morning America, CNN, The Martha Stewart Show and Oprah.
Lesonsky regularly writes about small business for numerous websites and for corporations targeting entrepreneurs. Many organizations have recognized Lesonsky for her tireless devotion to helping entrepreneurs. She served on the Small Business Administration’s National Advisory Council for six years, was honored by the SBA as a Small Business Media Advocate and a Woman in Business Advocate, and received the prestigious Lou Campanelli award from SCORE. She is a long-time member of the Business Journalists Hall of Fame.
Bank of America, N.A. engages with Rieva Lesonsky to provide informational materials for your discussion or review purposes only. Rieva Lesonsky is a registered trademark, used pursuant to license. The third parties within articles are used under license from Rieva Lesonsky. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.
Bank of America, N.A. Member FDIC. ©2017 Bank of America Corporation