Small Business Cash Flow Management - A Top Priority
One of the top reasons 50% of small businesses fail during their first 5 years is poor cash flow management. Businesses can still be profitable but run out of cash. From overspending to not having a managed budget, small businesses suffer when their cash flow isn’t a top priority. With today’s volatile environment, this has become a top concern as we focus on keeping our small business community afloat.
How much cash on hand should a business maintain? Needs will vary between businesses, but in general, experts recommend that businesses keep enough cash to cover 3-6 months of operating expenses. Remember - Profit does not equal positive cash flow! Creating a positive cash flow requires a more in-depth analysis than simply reviewing your Profit and Loss Statement.
Effective cash management requires a laser focus on key areas that drive cash flow:
Accounts Receivable: Are your customers paying on time? Do you review and manage your Accounts Receivable - what is the average days outstanding? Do you have someone focused on your AR Aging and following up with customers? These are questions you need to ask - making sure your customers pay on time is a necessity!
Accounts Payable: Cutting business expenses should be a priority. One of my favorite aspects of managing my business is negotiating with vendors to reduce my overhead costs! It requires focusing on recurring monthly, quarterly and annual expenses. Do you really need subscriptions or services you’re not utilizing - do you even know exactly what you are paying for? When was the last time you reviewed your insurance policies, leases, rental contracts? I make it a point to review and comparison shop before any policy, lease, or contract comes up for renewal. You’ll be pleasantly surprised how skillful negotiations can reduce overhead costs and increase your cash flow!
Business Line of Credit: Establishing a line of credit is a great insurance policy against cash flow problems. A line of credit is usually based on a % of your Accounts Receivable - another reason to monitor your receivables! The initial set up for a line of credit requires some effort and will entail an annual review/renewal - but the benefits definitely outweigh the hassle!
Business Credit Cards: Utilizing credit cards can cushion your cash flow, but make sure you don’t overextend. Look for cards that offer rewards - there are a lot to choose from! Do your homework and review the credit card offers so you receive the greatest benefit for your business.
Government Grants and Funding: This is one of the most important tools in today’s volatile environment! We have helped our clients secure enough cash to keep them afloat during these turbulent times. This was accomplished by utilizing the Paycheck Protection Program and the Economic Injury Disaster Loan. Not only did we secure funds for our clients, but we are working diligently to ensure these loans are forgiven. However, our efforts do not stop there; we have now submitted applications for the 2nd round of PPP funding. Knowing what resources are available is essential for small businesses to survive! The Small Business Administration has great resources and information to help small businesses. https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
Understanding the drivers of cash flow is the first step. Establishing a budget to maintain and accurately estimate cash flow gets you to the finish line. We recognize that most small business owners focus on running their business. We focus on helping small business owners understand their business. Contact us today to discuss how we can alleviate your concerns and focus on your needs. We’re here to help - our success is measured by our clients’ success!