Even a business that's profitable on paper can go under without cash flow.
When you think about the financial longevity of a business, you usually think about its revenue and profitability model, with the emphasis always being on generating a profit.
Most entrepreneurs get into business with the primary intention of generating enough profit to serve as a stream of income, and as a result, profitability becomes the bottom line.
This is understandable, but there’s a financial concept even more important than profitability in a business, at least at the early stages, as even profitable businesses (on paper) can go under without it: cash flow.
Why Cash Flow Is Important
Cash flow is a measure of your business’s financial health. It refers to the current amount of liquid capital your business has access to. Basically, it’s a description of the difference between your incoming money and your outgoing money. If your cash flow is positive, you have more revenue coming in than expenses going out, and your business can stay afloat.
If your cash flow is negative, you have more expenses going out than revenue coming in (even if your on-paper numbers indicate a profit). If your cash flow is negative, you won’t be able to pay your bills, and your company will likely collapse. On the other hand, keeping your cash flow positive will keep your company in good financial standing.
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Achieving “Better” Cash Flow
Obviously, you don’t want your cash flow to ever run negative. At that point your business would likely collapse. But more positive cash flow is always a good thing, and these strategies can help you improve it:
1. Be aware
Fortunately, the first step is easy. All you have to do is be aware of how your cash flow is developing. It starts with a monitoring process; if you notice your cash flow getting too close to the negative side of things, you’ll have a clear opportunity to take corrective action before any negative consequences set in.
You can also gauge to see whether your cash flow management strategies are working. Ideally, your financial expert will be in charge of this, but if your new company doesn’t yet have a strict financial “department,” you’ll have to take the role on yourself. Watch your cash flow carefully, on a weekly basis or even more frequently depending on the nature of your work.
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2. Bill in a timely, consistent manner
Billing is how you manage your incoming revenue. Just because you have lots of customers owing you lots of money doesn’t mean that money’s going to come in, or come in on time.
Your first step to managing this process is billing in a timely and consistent manner; invoice your customers as soon as possible after completing delivery of your products and services, and negotiate terms that favor your business.
Have a process in place so that no invoices are sent late, and no jobs slip through the cracks, this, too, would ideally be on your financial department.
3. Secure a line of credit you can tap into
It’s also important to establish a line of credit as a temporary measure, or safety net, that you can tap into if your cash flow starts teetering on the brink of negative flow. With a line of credit, you can access extra reserves without excessively worrying about accumulating debt.
There are many types of credit a small business can establish, each of which have advantages and disadvantages depending on your type of business and current available resources. Most financial providers offer some forms of credit for small businesses.
4. Follow up with late payers
If one of your invoices isn’t paid on time, don’t sit on your hands and hope that the check is in the mail. The day after your invoice is due (and you still haven’t received payment), begin execution of a standard follow-up process. Start with a polite heads-up email (or phone call) notifying your customer that the invoice is past due with a friendly reminder to pay up.
After a few days, you can escalate your efforts to gradually stricter requests. Always remain cordial, professional, and respectful, but don’t beat around the bush. You need to be paid, on time, if you want your business to survive. If it comes down to it, withhold services or threaten legal action to encourage payment.
5. Delay payment of outgoing expenses
Your outgoing expenses are the other side of the cash flow equation. Aside from cutting your expenses down entirely, there isn’t much you can do to manage the quantity of money you spend. You can, however, strictly manage the methods in which you spend it.
Delay paying your bills (or any other expenses) until the last possible day the money is due; even a 30-day delay can keep that money in your account long enough to remain useful, and give you a month’s head start in managing your cash flow.
With these five basic strategies in place, you should have little trouble managing a positive cash flow for your business. This isn’t a one-time process, so don’t let down your guard, your business is most sensitive during the early stages of its development, but that doesn’t give you an excuse to stop monitoring your incoming and outgoing expenses. Prioritize your cash flow if you want your business to survive.