For entrepreneurs, cash flow is a vital component of business operations. Business owners shouldn’t just take notice of available cash when times are tight; maintaining an optimal level of cash on hand in all circumstances ensures your business can make it through any financial bumps in the road.
Here are a few tips on keeping your cash flow where it needs to be for business security.
1. Offer Early Payment Discounts
Incentivize your clients by giving them a discount for early payment. An acceptable discount is 2% but up to 5% may be worth the slight revenue reduction. Your customers, whether individuals or other businesses, like to save money too. Give them a reason to pay you right away and reduce the risk of late or missed payments that cause a dip in your cash flow.
2. Set Up Extended Payment Deadlines
Whenever possible, pay what you owe to vendors right away. For the months when there may be a gap in cash flow and payments, however, set up an extended payment agreement with the people you owe. This can mean an official 60-day turnaround for all payments, or even a clause in the agreement that allows it a certain number of times in a year. Don’t pay late if you have the money on hand, but be prepared in case you need to use that option on occasion. It will save you money on late payment fees and also allow more time to receive revenue to pay the bills.
3. Build a Cash Reserve
Think of a cash reserve as a savings account of sorts for your business. This is money that is not allocated to anything else but is simply available if you need it. Financial experts recommend keeping three to six months’ operating expenses in a cash reserve, but you can adjust those numbers based on the stage of your business and what you plan to spend in coming months. Figure out a smart amount for what you need to operate, and then set it aside.
4. Finance When it Makes Sense
Just because you have the cash on hand to handle any unexpected expenses does not mean that you should spend it. There are times when it might make more sense to leave that cash alone, and seek out short- or long-term financing instead. You can do this through a small business loan or even a business credit card. Do your homework to find the right credit option for your needs. Don’t break into your cash stash if there is another way around it – particularly when the amount in your cash reserve isn’t enough to cover the expense anyway.
5. Hire a Money Manager
Sometimes you have to spend money to make money and that is definitely the case when it comes to handling your financial matters. Perhaps you don’t have the budget for a full time accountant on staff – hire part-time help or go to a local firm once a month. It’s difficult to be objective about spending for your business when you own it. Let someone else take a closer look at money coming in and going out – and give you advice on spending and saving.
6. Know Your Break-Even Point
What is the number you need to reach each month to start making money? You can figure this out by adding up your operating expenses, wages, overhead costs, and your own salary. How much do you need to make to meet all of those obligations? Once you have that number in mind, you can spend with greater savvy and as a result, keep your cash flow at its optimal level.
7. Follow a Budget
This may seem obvious but it’s vitally important to the health of your cash flow. Business owners often focus too much on profits and not enough on spending. You aren’t really getting ahead if the amount you make off each sale can’t cover your other expenses. Save money wherever you can and track all of your business spending. Having a spreadsheet or software that can quickly break down cash coming in and going back out will make you more mindful of how that hard-earned business money is spent.
Keeping a robust cash flow takes vigilance but it will help protect your business during tough times. Your cash on hand gives you more stability and having enough of it will help you sleep better at night.
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