No money, mo’ problems. Small businesses need more than profits. They need cash!
So, you go to a restaurant, stuff your face, then tell your server you’ll pay your dinner bill once you get paid next week...30-60 days, latest. Think the manager will be okay with that? Or do you think he’ll hand you a hairnet and point you to the stacks of dirty dishes in the kitchen?
As the song goes, “Money makes the world go around.” Most small businesses measure their success by their P&L statements. However, many profitable companies go under because they don’t have the cash on hand to cover their operating expenses. Here are some steps you should take (and not take), to help you maintain a positive cash flow and keep your cash flow statements (CFS) balanced.
While your accounts receivable department works on your cash inflow, take steps to reduce the outflow. Repair your equipment before replacing it, and if you have to replace it, go used if possible. Place payroll on a semimonthly cycle instead of biweekly. And keep an eye on personal expenses.
Prepare a forecast of your expected monthly cash flow for the coming year and be honest! Does your business have a slow period? Are there any big-ticket items that you anticipate coming up? Don’t base your projections on best-case scenarios. Go by industry benchmarks and your most recent cash flow analysis or statement.
Almost all companies at one point or another find themselves in need of a sudden infusion of cash. Don’t wait to open a business loan or business line of credit (LOC) until you need it. Do it now so you can take the time to find the best interest rate and have access the funds when you need them.
You can’t pay your bills (or restaurant tabs...see above) with unpaid invoices. Collect receivables ASAP. Offer discounts to customers who pay quickly. Charge a reasonable penalty fee on payments late beyond 30 days. Have customers preauthorize checks. Whatever you do, don’t lose track of billing. Let me repeat that for those in the back: Whatever you do, don’t lose track of billing!
Like you, your vendors will want to be paid ASAP. Find the right balance and timing for paying your bills on time while taking advantage of the terms allotted. You want to keep a good credit rating and cordial relations with critical vendors.
There will be shortfalls. Especially if your business is just starting out. You should have a cash reserve equal to at least two months of your company’s operating expenses (four is ideal). This will keep you running when you’re hit by an unexpected dry spell, a client fails to pay up, a major piece of equipment dies, or any other number of bumps in the road that are bound to happen.
This article is part of a series intended to help small businesses operate more efficiently and productively. Contact RCN Business today to learn how you can reach those same objectives with our suite of communications products and services.