Smoothing out and maintaining cash-flow is a huge, ongoing task as a small business owner. If your business is seasonal and/or service-oriented, managing cash-flow will be an even greater challenge. Positive cash-flow is essential for paying salaries and suppliers, buying materials and equipment and covering rent and utilities – it keeps the lights on and the doors open.
What Does It Mean to Have Positive Cash-Flow?
Covering expenses and other operating costs involves either using money received from sales and receivables or working capital that has been invested in your business. A problem can arise when your otherwise healthy business begins to struggle with the timing of its expenses relative to its sales. Even a profitable business with a high demand for its products or services can find itself in a negative cash-flow situation. When your business experiences consistent patterns of negative cash-flow, it can become a big issue. You might be forced to slow your business growth simply because cash inflows cannot support the cost of cash outflows.
Your business is cash-flow positive when more money is coming into your business than is going out at any given time. The key is to implement strong cash-flow management. The goal is to convert sales into cash as quickly as possible and increase the gap between inflows and outflows.
Strategies to Speed Cash Inflows
Create a cushion of cash
The first step in maintaining positive cash-flow is to create a cash cushion. While your business may have positive cash-flow today, a month from now you might be facing a negative cash-flow situation. This cushion in your cash on hand – enough to cover the next payroll period, at least – will help your business successfully weather any unexpected situations that might arise.
Retire or sell idle equipment or inventory
Idle and non-working equipment takes up space and ties up capital you could be utilizing more productively elsewhere. In addition, excess inventory can quickly become obsolete as raw materials change to meet customers’ preferences and requirements. If you currently have inventory that is unlikely to be used over the next 12 months, you should consider selling it (unless the costs to retain it are minimal).
Speed up the collections process
To shorten your receivables period, you will need to implement a strong collection system. It is essential that you create a disciplined process for invoice collection, stick to a regular payment schedule and have a written agreement between you and the client. Offering your customers multiple payment options (e.g. check, direct deposit, credit card, etc.) can also speed up the collections process and ensure you are paid on time. The invoicing process should be as simple as possible.
Partner with an invoice factoring company
Invoice factoring allows your business to sell outstanding invoices to generate cash quickly. Rather than waiting 60 or even 90 days to receive payment, you can sell your receivables at a discounted rate and receive an advance rate of up to 80-90%. Because factoring is a sale, not a loan, your business can increase cash-flow without jumping into a vicious cycle of debt and fees.
Ways to Reduce Cash Outflows
Repair capital equipment rather than replacing it
When properly maintained, equipment can provide years of services. To minimize costly repairs and replacement, establish a regular maintenance program for all your business’ equipment. If a complicated repair does occur, consider working with a local repair facility and using replacement parts from third-party suppliers. If replacing the equipment becomes your only option, search local advertisements and auctions for used equipment in good condition.
Lease equipment instead of buying it
In general, equipment leasing requires less cash upfront and typically involves lower monthly payments due to longer lease terms. Leasing vehicles, computers and other business equipment also ensures that you have access to the latest features. You not only avoid tying up your business’ cash, but you can also expense the lease costs on your business taxes.
Forgo the appeal of new technology
From new electronic gadgets to advances in artificial intelligence (AI) and machine learning, the introduction of cutting edge technology is never-ending. Before you break down and purchase the next big thing, make sure the new features will provide meaningful performance improvements for your business. In some cases, the benefits of the product are simply not worth the cost.
Delay payments to vendors
Unless there is a worthwhile incentive for you to pay early, you can keep cash in your account a little longer and pay the vendor when the payment absolutely must be there. However, while slowing the overall outflow of cash is important, it is just as important to maintain a good relationship with vendors and leave your credit rating unscathed. If you find yourself in a situation where you need to delay payment, make sure you contact the vendor and provide your plan for becoming current on your debt.
While there is no clear-cut solution or formula for maintaining positive cash-flow, it is possible. Through consistent cash-flow management, implementing cash-flow strategies and adjusting as needed, your business will reach – and maintain – the goal of positive cash-flow.
Security Business Capital’s Cash-Flow Solutions
At Security Business Capital, we know small businesses often face unforeseen cash-flow issues or payroll funding issues and need cash to cover those costs quickly.The team of experts at SBC specialize in helping companies secure the funds they need to operate smoothly and take advantage of opportunities. Oil and gas services, temp staffing, manufacturing/distribution and transportation are just a few of the business types that can use SBC’s invoice factoring services to generate cash on hand.
If you are interested in learning more about how our cash-flow solutions work and howthey can help your business grow, get in touch with us today for a free quote and/or consultation.
Maintaining cash-flow is an important, ongoing task as a small business owner. The following cash-flow strategies will help your business convert sales into cash as quickly as possible and increase the gap between inflows and outflows.