In addition to a business plan and a mission statement, cash flow management is a key component of small business success. With well-managed cash flow, a small business can more easily manage the ups and downs that come with running a business.
Here are seven simple strategies to optimize your cash flow.
1. Understand your break-even point.
Your break-even point is the minimum amount of sales you need to pay your expenses. Knowing your break-even point helps to project future cash flow. It will also show you when sales equal or surpass expenses.
2. Receive all receivables.
A 2017 survey of B2B payment behavior from credit insurer Atradius reported that 48.8 percent of United States businesses' invoices are overdue. To up the odds of timely payment, invoice promptly and track receivables diligently and follow up on any past-due invoices immediately. Consider deposit requirements, especially for new customers or high-dollar orders.
To stay on top of receivables, delegate an accounts receivables (AR) manager to review AR every week. They can not only stay on top of past-due invoices, but also remind clients when an invoice is nearing its due date. Accounting software makes tracking AR easier than ever.
3. Manage payables strategically.
As a business expands, expenses often grow faster than sales. Hang onto available cash as long as possible. Pay invoices on or close to the due date. If you have a good relationship with a supplier, ask it to extend terms from 30 to 45 days to free up available cash.
Hanging onto available cash keeps your cash flow strong during a growth period. And if your business runs into unexpected expenses, you'll have more cash on hand to cover the costs. In accounts payable, the goal is to increase the size of the asset – available cash – while maintaining a strong credit rating.
4. Consider early payment discounts.
If you have strong cash flow and a supplier offers an early payment discount, take it. Even a 2 percent discount, year after year, can add up to significant savings.
Before you pay two weeks early for a five percent discount, however, compare the savings to the cost of not having that cash available. You may fare better keeping the cash on the balance sheet.
5. Tighten credit terms – a little.
Make minor changes to credit terms to bring in cash sooner. For example, up your deposit requirement from 10 to 12 percent, or reduce payment terms from 30 to 28 days. Your customers likely won't balk at minor adjustments. A large shift, such as moving from net 30 to 15, may push good customers away.
6. Gain insight.
Develop a 12-month cash flow projection at least once a month. A cash flow projection analyzes operating cash, revenues and disbursements to help you identify shortfalls before they happen. For longer-term forecasting, create an annual cash flow projection for two and three years out.
With regular monitoring of money in and money out, you can improve your cash flow and more easily manage the surprises that come with running a small business.
7. Get rid of outdated or excess equipment.
You probably have old equipment lying around and taking up much needed space. Whether it's obsolete printers, boxy desktop computers or outdated inventory, you can sell these items and invest the cash into something more useful. When selling equipment, you may also be able to boost cash flow through potential taxable gains.
You can also consider the possibly more cost-effective option of leasing out your devices instead of buying, allowing you to have the latest technology, which is more energy-efficient, too.
Your business infrastructure is a living, breathing thing. Regularly applying the strategies above will help you better monitor how you're running your business and speed up the cash flow.