Business cash flow is one of the most important concepts for a business owner to understand in order to run a successful business.  Every business, at some point or another, has to deal with cash flow problems.  In fact, most business owners anticipate negative cash flow for the first several months or years of operation.  In order to get to the point where your business becomes profitable, you need to be able to get through this phase of business.  What separates successful entrepreneurs from unsuccessful ones is how they deal with this cash flow deficit.

The cash flow problems commonly encountered by business owners can be understood by comparing how much money has to be spent in order to provide your product or service and how long it takes for you to collect payments.  At its core, the solution to cash flow problems, aside from seeking capital infusion or taking on debt, is to delay your payables as long as you can and to encourage anyone who owes you money to pay you as soon as possible.

Managing Receivables

  • Consider offering discounts for upfront payments.  It may be worth a few dollars to get paid upfront rather than waiting and having to worry about collecting later.  It can also foster customer loyalty.
  • When taking on a new customer who isn’t paying cash upfront, pulling a credit report can be helpful to understand their willingness and ability to pay debts.  There’s more than just a credit score to consider.  A credit report can identify potentially harmful trends such as late payments or judgments filed by other people they’ve done business with.
  • If you’re having trouble moving a certain product, don’t  be afraid to get rid of it at a steep discount if you have to.  Whatever money you can get from outdated inventory will be more useful to you than letting it sit in your warehouse.
  • Issue invoices promptly.  The sooner you invoice someone, the sooner they’re likely to pay you.  You certainly aren’t going to get paid before you send an invoice.
  • Businesses that accept a lot of payments by debit or credit cards should be aware of how long it takes their credit card processor to forward those payments to their bank account.  Many businesses wait 2 or more business days to receive deposits.  Next day funding is a valuable service that makes credit card sales available in just one business day.

Managing Payables

  • If your creditors give you a 30 day grace period to make a payment, don’t pay it next week.  Wait the full 30 days.  It’s the equivalent of an interest free short term loan.
  • If you find yourself in a situation where you need to delay your payment for whatever reason, do not be afraid to communicate with your vendors and let them know.  If you have a good history with them, you may find that they’re willing to understand and be cooperative because they want to keep your business.
  • When choosing your vendors, don’t focus entirely on the lowest price.  Flexible payment terms may be more important than saving a few pennies.
  • Sometimes, vendors may offer you a discount for paying upfront.  This should be carefully considered.  Reducing your overall costs, and therefore improving your margins, is important, but not if it is detrimental your cash flow.

Sometimes, despite our best efforts, we can still come up short on a cash flow basis.  Knowing all of your options can be the difference between surviving a negative cash flow situation and having to close up shop.  If you consistently have invoices outstanding and aren’t able to encourage early payments, consider invoice factoring.  For just a few percentage points, you can have immediate access to the money that’s owed to you and let the factoring company worry about collecting payment from your client.

A small business loan is usually a great idea too.  The problem is that it’s hard enough to qualify for a traditional business loan as it is.  When the bank sees that your having cash flow problems, they’re not going to be comfortable with your ability to make monthly payments.  Thankfully, there are alternatives to business loans to be considered.  An unsecured business loan or a business cash advance may be a good fit for your business.  I’ve written more about them here.