Did you know it is possible for your small business to be profitable, yet simultaneously be unable to pay its bills due to poor cash flow? This mismatch between the timing of cash inflows and cash outflows is known as a cash-flow gap. For instance, if you receive a large order but have to wait on payment from customers to purchase the necessary supplies to fulfill that new order, you have a cash flow gap to fill.
Understanding and maintaining positive cash flow is critical to the operation and success of your small business. It suggests that you are in a position to reinvest in your business, pay expenses, operate smoothly, and create a buffer against future financial challenges. In short, positive cash flow is a huge indicator of the overall health and financial performance of your business.
How to Avoid or Close Cash Flow Gaps
Few businesses completely avoid cash flow gaps. At some point, most businesses will experience the need to secure some form of working capital financing to boost cash flow on a regular or semi-regular basis. Achieving positive cash flow involves a lot of careful planning and informed decision making. In order to keep your finances running smoothly, you will need to constantly evaluate performance and be prepared to adjust your practices as necessary.
Here are 6 ways you can reduce a cash flow gap, meet short-term needs, and preserve the long-term financial health of your small business.
Master Cash Flow Management
According to a U.S. Bank study, 82 percent of business struggles and failures are due to cash flow problems or a poor understanding of how cash flow contributes to operations. Every business will experience its fair share of cash shortfalls. The key to overcoming them is strong cash flow management. Keeping track of important factors like the quantity of stock and raw materials, the number of outstanding invoices, and how much cash is tied up in ongoing projects will help you determine your break-even point. With this information, you can then take steps to achieve a positive cash flow position.
Encourage Timely Customer Payments
How does your business stay cash positive? It needs a reliable revenue stream and an influx of cash, which hinges on your client’s invoices being paid on time. If you are experiencing cash flow problems, ask yourself what you can do to make it easier for your customers to pay faster. Have you considered providing an auto-billing cycle? Accepting online payments? Or offering early payment discounts? By utilizing different methods to speed up the payment process, you will unlock money sitting in unpaid receivables and increase your business’ cash flow.
Build Up a Cash Reserve
In the business world, the term used to describe an emergency fund or rainy day fund is “retained earnings.” The main purpose of these funds is to assure the solvency and flexibility of the business and its ability to meet unexpected expenses. Likewise, opportunities often arise when you least expect them and require extra capital that you might not have planned for. By maintaining a solid reserve – financial experts recommend anywhere from three to six months of your company’s expenses – you will be able to easily manage unexpected costs, bridge cash flow gaps, and capitalize on opportunities to grow.
Know When to Lease and When to Buy
A huge part of keeping positive cash flow is carefully monitoring business expenses to ensure that they stay low. While different industries and companies have their own unique needs, all businesses require some type of equipment, machinery, technology, and facilities. However, before you invest your hard-earned capital into fixed assets, carefully assess whether you should buy or lease. If you decide to buy, you should also consider whether to purchase new or used. Making a well-thought-out purchase or leasing decisions will help you prevent large portions of capital from being tied up in these items.
Optimize Your Payroll Process
In addition to increasing cash inflows, you should also consider ways to reduce and delay cash outflows like optimizing your payroll process. By placing payroll on a bi-monthly cycle, for example, you can shift from 26 pay cycles of a bi-weekly pay program to 24 pay cycles. This allows your small business to reduce the administrative cost of managing, collecting, verifying, and tabulating payroll information. Utilizing direct deposit into employees’ bank accounts is another way to free up valuable time and resources and achieve additional cost savings.
Establish a Flexible Source of Funding
Even if your business has a solid cash reserve, it is always wise to have a source of business funding that will help you maintain positive cash flow, cover additional costs, and avoid unnecessary debt. Before you apply, make sure the funding source you are considering will not only provide quick capital but also protect your business’ long-term financial health – like invoice factoring. Knowing which lender and funding option is right for your business before you need the capital can help you prevent future cash flow problems, and carry your business through tough times and periods of rapid growth.
How Invoice Factoring Can Help Manage Cash Flow Gaps
Are you struggling to manage your business’ cash flow fluctuations? If so, invoice factoring can help you meet your business’ changing needs. Invoice factoring, also known as accounts receivable factoring, allows your businesses to partner with a factoring company to sell outstanding receivables and generate immediate capital. Rather than waiting for 30, 60, or even 90 days to receive payment, your business can receive up to 95 percent of an invoice’s value in as little as 24 hours.
Since factoring provides cash your business has already earned and is simply waiting to be paid, you do not incur any new debt. Another advantage, the amount available through factoring is only limited by the number of eligible invoices you have to factor – so your source of funding should never run out. As your receivables grow, so does your line of credit.
Security Business Capital understands the challenge of managing cash flow gaps and offers flexible cash flow solutions that help businesses thrive. Our invoice factoring services, for example, provide the quick source of funding you need to boost cash flow, operate smoothly, and grow your business.