If you’re an entrepreneur, managing a healthy cash flow is vital for the survival of your small business. It's essentially the main artery of your company. This is why it’s important to adopt several proactive strategies and anticipate any future peaks or valleys.
What is Cash Flow?
Before we dive into the specifics, we need to understand the basics. According to The Balance, cash flow is the amount of money moving both in and out of the company during a specific period. Picture it as the tide, moving water both towards the shore and out to sea throughout a given day.
So cash is being drained on certain things like rent, loan payments, and taxes. Meanwhile, cash is coming in through goods and services you’re selling to customers. Although, some customers may take a little longer to pay, which increases your accounts receivable and decreases your cash flow.
One of the most prevalent reasons why start-ups and small businesses fail within the first year is because they can’t adequately manage their cash reserves, according to the Small Business Administration. This is why both information and education are vital if you're planning on launching an entrepreneurial endeavor.
Here are a few tips on how to effectively achieve a positive cash flow for your small business.
Ask For a Deposit
A great strategy to maintain a healthy cash flow is to ask clients to make a deposit before the goods or services are rendered. This ensures a partial payment and usually guarantees the client will pay the full amount in the near future. Industries that typically ask for a deposit include construction workers, PR firms, marketing agencies, graphic and web designers, property developers, lawyers, and business consultants. Some clients may not be enthusiastic about forking over a hefty sum of money, but we recommend writing it in your ‘terms of agreement’ to officiate the process.
Track Down Clients
This is a delicate process, but we recommend approaching every situation with tact and politeness. Don’t be a pushover but try to be firm and understanding when you’re interacting with clients in order to recover an unpaid invoice.
You can also use a service like InvoiceSherpa, which automates your accounts receivable by syncing with your existing accounting software (such as Quickbooks, Xero, Freshbooks, etc.) and pulling all your invoices and customer data. So, if a client is overdue on a payment, InvoiceSherpa will send multiple messages through various mediums reminding them it’s time to pay up. This is an excellent way of keeping track of your accounts receivable and maintaining a healthy cash flow.
Create a Reserve
Entrepreneurs are like sailors; they need to be able to navigate the rough seas and survive torrential hurricanes that could potentially destroy their ships. All metaphors aside, it’s important to establish a cash reserve, which can act as a cushion and soften the blow during a bad period. We recommend cutting an unnecessary expense or taking a small pay cut (if applicable) and siphon this money to an untouchable reserve. You can only access the funds if it’s a dire emergency and can serve as a lifeline. This can be the deciding factor in keeping your company afloat during a rocky phase.
Keep Things Updated
One of the basic principles of accounting is to keep things up to date so you know exactly where your company stands at all times. So, if you employ a bookkeeper, stress the importance of keeping the accounting ledgers organized and precise. A bookkeeper should be one of your most trusted employees, so it’s important to establish a level of trust and ask them to provide regular financial reports
Don’t worry if you don’t have a bookkeeper, although you should be utilizing certain tools available on the market like InvoiceSherpa that will simplify the accounting process. This service can provide an accurate financial snapshot by carefully keeping track of your accounts receivable.
If the company is experiencing a period of financial difficulty due to the fact several customers have not paid their outstanding invoices, you should consider selling some assets. Therefore, if the company owns some equipment that is no longer needed or necessary, put it for sale to generate some cash. It’s wiser to liquidate these items as opposed to relying on your cash reserve.
Push For More Sales
If your financial situation is looking dire, another great option is to increase your sales quota to offset the lack of cash. Depending on the industry, this may involve a bit of hard work, which includes chasing new leads and convincing new clients to purchase your products or services. If you’re leading a group of employees, sit down with them and respectfully address the situation and call for a stronger sales push.
Separate Personal Finances
You must separate your personal expenses from your business in order to get an accurate picture of the company finances. This way, the financial statements won’t be diluted, and you can use any leftover cash to reinvest and strengthen the financial foundation of the enterprise.
By adopting the aforementioned strategies, you can maintain a healthy cash flow and properly grow your business to achieve its full potential. Some of these tips will be difficult to implement, but the results will undoubtedly have a profound and positive effect on your cash flow.