Cash flow is the lifeblood of any business, regardless of type or size.

If delinquent payments become a problem for your business, consider requiring upfront deposits.

As a small-business owner, you face unique challenges when it comes to managing your income and expenses for short-term solvency and long-term success.

In this article, we’ll share four smart strategies for avoiding common cash flow pitfalls and strengthening your capital position.

1 Track Your Cash Flow Meticulously

In cash flow management, failing to plan is planning to fail. If you aren’t proactive about regularly monitoring and forecasting your cash flow, you may experience disruptions that could harm your business.

The best way to get started is by using your accounting software to generate monthly cash flow statements. These financial reports break down the sources of your business’s revenue and how you spent those funds.

Check for patterns and trends every time you review your cash flow statements. One rule of thumb is to look at the relationship between your net cash from operations and your net income. If the two figures tend to rise in tandem, that’s a promising sign. But if income keeps outpacing cash, that’s suggestive of inefficiencies that could lead to a cash crisis.

Identifying patterns is also the key to effective cash flow forecasting, which is the process of estimating your company’s future cash levels based on anticipated payables and receivables. This is especially important if your business is seasonal or cyclical in nature. Noting recurrent ups and downs is a good first step, and these observations can be enhanced with industry trends and market indicators to improve the accuracy of your projections.

2 Streamline Your Invoicing

When you’re busy making sales and completing work, invoicing often gets put on the back burner. But slow payments can quickly become a problem, jeopardizing your ability to meet your own financial obligations in a timely manner.

If your company makes a large volume of credit sales, even a slight decrease in your average collection period can significantly increase the amount of cash you have on hand.

To get paid faster and improve your cash flow, communicate payment terms clearly, send invoices promptly, and provide multiple payment methods. Online invoicing tools make it easy to send automated reminders and facilitate payments by card or ACH. You can also consider a “carrot and stick” approach: offer discounts for early payment and impose fees for late payment.

Above all, you want to avoid carrying bad debt. If delinquent payments become a problem for your business, consider requiring upfront deposits, running credit checks on prospective clients, or taking out a trade credit insurance policy.

3 Implement an Effective Inventory System

By enhancing your inventory process, you’ll be better positioned to ride out periods of diminished cash inflow. The main objective is to avoid overstocking (which leads to working capital crunches) and understocking (which leads to lost sales).

Here are some popular inventory management methods to consider:

• FIFO (first in, first out) can be useful for businesses that sell perishable or trending products, like a bakery or an electronics retailer
• LIFO (last in, first out) may be a good option for businesses that sell goods subject to frequent price changes
• WAC (weighted average cost) is a simplified approach for homogenous goods, like agricultural products or raw building materials
• Specific identification enables you to individually track unique or high-value items like fine jewelry or antiques

Regardless of which method you choose, make sure you understand the time frames and limitations of your key vendors and negotiate favorable terms.

Also, any of these methods can be tracked manually, but digital tools can be a big help. Explore software solutions like enterprise resource planning (ERP) systems that can integrate accounting, HR, sales, and other functions to simplify inventory and staffing processes.

4 Explore Financing Options

Do not become over-reliant on debt to bridge cash flow gaps, but carefully considered lending products can be part of a sound financial plan. Discuss your specific needs and goals with your banker and collaborate to find a solution that works for you.

One likely solution is a business line of credit, which offers flexible access to funds on a revolving basis and serves as a financial safety net even if you don’t need to use it. Some lines of credit may be secured by fixed business assets or personal guarantees, potentially increasing your borrowing capacity and lowering your interest rate.

Other short- and long-term financing options include:

• Equipment leasing, which enables you to spread out the cost of big-ticket fixed assets, allowing you to conserve capital and credit lines for other purposes
• Invoice factoring, which converts outstanding receivables into quick cash, providing a potential short-term fix for lagging average collection periods
• Trade credit, which can let you delay vendor payments until revenue increases, even if you have limited access to traditional sources of financing
• Term loans, which give you a lump sum upfront, repayable in predictable monthly payments, making this an attractive option for managing large, one-time expenses

In determining whether your business qualifies for financing, your lender may assess multiple factors, including the amount you are seeking, how you intend to use the financing, your ability to repay the debt, and your business and personal credit profile.

Keep It Up

Cash flow management is essential for your business’s continued success, and it’s the kind of work that’s never “done.” These best practices require ongoing attention, and you’ll probably need to fine-tune your strategies as circumstances change.

To learn more about tools that can help you optimize cash flow and your overall financial health, reach out to us.

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