4 Questions to Ask When Managing Your Cash Flow
Timing is everything in a small business, especially when it comes to your cash flow. You need the right balance of money coming in so you can pay your financial obligations (or take advantage of a new opportunity). It’s what keeps 69 percent of small business owners up at night, according to one study. That’s why it’s important to manage your cash flow to maintain the balance needed to keep your business afloat.
Your financial professional is in the best position to offer advice on cash-flow issues. But here are some questions to consider as you work together to learn what’s right for your business.
How quickly do customers pay?
In some businesses, customers pay at the point of sale/service. Others invoice customers and get paid 30 days later. Still others set up installment plans where customers pay a little each month until the total is received. It’s not that one method is better than another. The key is having a plan in place to manage it. The longer you wait for payment, the slower your cash flow becomes.
Take a look at your processes to monitor payments. Do you have a standard practice for sending invoices and bill reminders? Do you clearly communicate when payment is due? What happens if it’s late? Some businesses charge a fee for longer payment options and impose late penalties. Others use collection agencies once bills become delinquent beyond a certain time period.
How well do you manage expenses?
The flip side of cash flow is how fast money flows out of your business. An important part of that is managing your expenses. It starts with an operating budget. Many businesses budget for expected expenses like rent or utilities. But they don’t plan for unexpected costs like repairs to equipment or damage from a leaky pipe. A good budget allows you to better anticipate expense so you have cash on hand when needed.
Another aspect is managing outgoing payments. Does it make sense to take advantage of savings from early payment options? Or is it better to float money by holding a payment until the due date?
How long do you carry inventory?
It’s great to have merchandise on hand to quickly fill a customer order. But it can disrupt your cash flow if it’s been on the shelf for too long. Money flowed out to pay for it but now it isn’t flowing back quickly enough. In the meantime, you have to pay suppliers for the inventory you buy.
Examine your inventory practices. That includes setting the minimum quantity you need inhouse. Do you vary the reorder frequency and quantity based on how quickly they sell? Your relationship with suppliers is an important part of managing inventory costs. They can help you manage issues like minimum order size, reorder speed, or provide temporary storage.
Do you have access to more cash, if you need it?
It’s important to have temporary sources of cash if your cash flow gets out of balance (or you want to take advantage of an unplanned but promising opportunity). This is particularly important for seasonal and start-up businesses where the income isn’t expected right away.
Some businesses establish a line of credit to deal with these situations. Securing credit in advance ensures quick access to capital when they need it. Advanced planning lets you apply for funds when your financial position is the strongest. That can help you negotiate more favorable credit terms.
Managing cash flow is a critical aspect of running a successful business. While each situation is unique, these questions can be a great starting point to achieve the right balance of money flowing in and out of your business.
Want more ideas? Watch this SCORE webinar to help you find smart ways to manage your business’ cash flow.