According to a U.S. Bank study, 82% of businesses that fail do so because of cash flow problems.
As a small business owner, it’s vital that you understand cash flow, how it affects your bottom line and how you can increase it. Read on for information you need to know.
What is 'Cash Flow’?
Cash flow is the net amount of cash and cash-equivalents moving into and out of a business. Cash flow shows how liquid a company is and indicates if the company is positioned to remain solvent.
Timing plays a big role when managing cash flow. For example: If your business operates on an invoicing system and invoices aren’t paid until after loan payments or other debt obligations are due, you could end up with a cash flow issue. Seasonal business can also have cash flow problems. If money flows in during a specific season, you might end up just scraping by the rest of the year.
Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing.
Why is Cash Flow Important?
Strong cash flow is one indication that you have the ability to generate and use cash. Cash on hand gives you better buying power and offers protection against loan defaults or foreclosures.
- Keeping Up with Debt Obligations
When you borrow money to buy equipment, inventory and other items to run your business, you’re using future cash flow to make those purchases. You’ll need positive future cash flow to pay back that borrowed money. Defaulting on debts ruins your credit rating and can sink your business.
With strong cash flow (and debt management), you can invest in growth strategies like beefing up inventory, increasing marketing, buying equipment and hiring employees.
- To Secure Low-Cost Funds
In addition to running your business efficiently and profitably, having sufficient cash flow is important if you’re seeking outside funds. Lenders want to know that you’ll be able to make loan payments for the life of the loan.
How to Improve Small Business Cash Flow
If cash flow problems are hindering your ability to run your business or get a small business loan, there are strategies you can put in place to increase it. Following are suggestions that can help.
- Don’t surprise your customers or others you invoice. Set a day when you distribute invoices and stick to it. This will avoid any confusion and let your customers and clients know when they can expect your invoice so they can plan accordingly.
Implement Late Fees
- The words “late fee” usually cause people to sit up and pay attention. An easy way to make sure you’re not waiting on late payments is to make your late fee policy very clear on invoices. According to Entrepreneur Magazine, effective invoice policies include a 5 percent late penalty after five days and work stoppage after 30 days past due (for service-based companies).
Use a cash-flow statement
- A cash flow statement tracks revenue and expenses for a specific time period. With this, you can anticipate money coming in and plan ahead for financial surprises. If you don’t use a cash-flow statement, you’re basically guessing. The SBA has an excellent template to get you started: A Simple Cash Flow Spreadsheet Anybody Can Use
Build an emergency fund
- David Bach writes in his bestseller, The Automatic Millionaire, “No matter how well you plan or how positively you think, there are always things out of your control that can go wrong." An emergency fund is a liquid account only used in the event of unexpected expenses or a steep drop-off in business. For guidance, read this article from QuickBooks. How to Create an Emergency Fund for Your Small Business
- Look at all of your expenses – from travel to meals to utilities – and perform an overall analysis. Even small expenses can cut into your cash flow. If you’re not getting a return on your investment, cut back or completely eliminate that expense.
Explore additional financing
- Low-cost funding can help small business owners manage cash flow. Consolidating high-interest existing debt with an SBA loan can save hundreds or even thousands per month. Getting a small business loan is the best bet to grow a small business with low rates, long terms and very low payments.