by Katie Mullin, courtesy of Hitachi Business Finance
Even the most well-established businesses have struggled with improper or inconsistent cash flow. Your sales may be in great shape, but if your customers are not paying invoices on time, you are going to face challenges meeting your expenses, having money to purchase new equipment, and having money to expand. This means you have to routinely evaluate your financial outlook to ensure you stay in the black. You will need to review:
- Income: Actual and Projected
- Expenses: Actual and Upcoming
- Difference Between Income and Expenses
Hopefully, the difference between your current income and current expenses does not result in a sea of red ink. Once you have evaluated what your projected income and expenses are, you can determine if you are going to face a shortfall in your cash flow. Here are some cash flow tips to help you stay in the black:
1. Understand Your Bottom Line
The first thing you will need to know is if you will get to a point where the cash you have coming in exceeds the funds you have going out. Knowing the point where you can break even is imperative to keeping your business running efficiently.
2. Tracking and Using Your Accounts Receivable
One of the most overlooked tools businesses have is their accounts receivable. While it may not be easy to get customers to pay their bills early, this does not mean you have to let your bottom line suffer while you wait for payment. Many businesses elect to factor their invoices, which provide cash flow from current invoices.
3. Learn to Manage Cash Flow
You can keep your balance sheet healthy by having a good understanding of when you could potentially face cash problems. Your options may include changing the terms you have with your vendors or changing when your customers are paying you for your services. Any negotiations that can positively impact your day-to-day cash will help you avoid cash shortfalls.
4. Rainy Day Funds Matter
When you have cash, rather than paying bills early, drawing a bigger salary, or buying equipment that is not immediately necessary, create a set-aside fund. Having funds available when you need them for emergency spending, particularly if you are not getting funds in to pay your routine expenses, is a must to keep your business functioning.
5. Wise Use of Existing Assets
Many business owners overlook one of the best tools for addressing cash flow problems. While many business owners are concerned about taking out loans that require personal assets to be used as collateral, these same owners overlook the possibility of collateralizing loans with their business A/R, inventory, and equipment. Asset-based lending can provide your business with additional cash to overcome seasonal sales slumps, help with business growth and even ensure you are paying your vendors in a timely manner.
6. Be Aware of Growth Opportunities
Business owners should always be on the lookout for new growth opportunities. While you may be experiencing some challenges with your current cash flow, there are opportunities to grow your business, such as mergers/acquisitions, hiring contract business development staff, or securing government contracts. If you are able to win a bid on a government contract, you should take advantage of government contract financing to maximize your cash flow.
7. Being Flexible Can Promote Growth
We all understand that sometimes to land a sizable contract, we have to exercise some flexibility. Unfortunately, this often creates a gap between income from the customer and the expenses necessary to fulfill the contract. If you have taken advantage of factoring your invoices, you will have the flexibility to pursue new contracts without being concerned your cash flow will be negatively impacted
8. Know Your Bottom Line: Steady Cash and Growth
The best case scenario is your business continues to thrive and overcomes typical financial challenges. For some business owners, reducing expenses may seem to be the only option for improving cash flow. As a business owner, it is always important to review your expenses and make sure you are not spending needed cash unnecessarily. Most expenses are fixed, so there is not much you can do about them except make sure you have consistent income that can sustain your spending. Monitoring expenses is important and if your business has seasonal fluctuations where sales decline, you have to make sure your expenses do not exceed your projected income.
9. Having a Plan in Place
Today’s businesses are facing more competition than ever before and steady growth is the only way to remain competitive. However, before you can grow your business you need to be aware of any shortfalls between income and expenses. While tracking your expenses and income is important, knowing what options are available to improve your current cash flow can be critical to your overall success. Never wait until you are facing a cash flow crisis to make decisions. Always find out what options are available to your business including lines of credit, factoring, and asset-based loans. While you may never face a crisis that threatens the existence of your business, you could jeopardize your business credit standing, impacting your ability to grow and land new contracts.
One of the problems business owners face is most traditional lenders take a “one-size-fits-all” approach to their commercial lending. This is problematic because not every business functions the same nor do they have the same financing needs. Businesses need a customized solution to their unique financing and cash flow needs. This is why it is so important for businesses to find a financial partner who understands their specific and unique needs.
Most business owners have one goal: to ensure their business continues to grow and thrive. To achieve that goal, your financial partners need to offer the services that best meet your needs. Whether you need working capital, flexible cash flow solutions or you simply need to enhance your profitability, customized financial solutions are imperative. Preparation is necessary to grow your business. Whether you need cash to meet your next round of payroll obligations, a line of credit to show your creditworthiness when bidding on contracts, or it is time to upgrade your equipment, the right lending partner can help your business thrive in this competitive environment.