Managed cash flow is vital to business expansion and financial security, yet can often prove challenging when customers don’t pay on time or unexpected expenses arise.
Small business owners can take steps to combat cash flow challenges by creating emergency funds and streamlining accounts receivable and exploring alternative financing solutions.
1. Establish an Emergency Fund
As a rule of thumb, it is wise to save at least three to six months of operating expenses as an emergency fund in case of unexpected emergencies like natural disasters, workplace injuries or global pandemics. While the exact percentage may differ based on your business and lifestyle needs, save at least 10% of current revenues each month without straining other operational areas or budgets.
Establishing an emergency fund allows your company to avoid using credit and loans with high fees, interest rates, or penalties that can harm its credit score and make qualifying for future loans difficult in case of another financial hiccup.
Establish an automatic savings transfer to a separate account to automatically contribute money for an emergency fund every month. Redirect large payments such as sales commissions, tax refunds or large payments into this fund as soon as they come in; keeping liquid funds easily accessible will ensure they can help in an unexpected emergency situation.
2. Streamline Accounts Receivable
No matter its industry or lifecycle stage, any company must generate more income than it spends. This is especially important in its early stages when validating research & development (R&D), going to market, building infrastructure and recruiting employees are necessary activities.
An accurate cash flow forecast allows business leaders to effectively anticipate incoming and outgoing payments and make informed decisions regarding the finances of their organization.
Simplifying the end-to-end accounts receivable process can help businesses accelerate payment cycles, save both time and money, gain insights into their business operations more rapidly, as well as gain deeper insights. It is wise to investigate alternative financing solutions during times of healthy cash flow; for instance opening a line of credit may provide protection in case unexpected expenses arise; also it’s beneficial for business to negotiate terms with suppliers regarding payment terms for early payment discounts to keep cash flowing even during slower times.
3. Avoid Delayed Payments
Successful business owners know the key to preventing cash flow problems is careful planning. Successful entrepreneurs develop cash flow projections which include an analysis of how sales will perform and the amount that their company will need to spend regularly, such as staff paychecks, utility bills and materials costs.
Consider how unexpected expenses will alter your cash flow projections, such as an emergency equipment repair bill or unexpected new client who requires immediate attention. Furthermore, ensure your company does not over-leverage itself by incurring unnecessary debt, such as by using supplier financing solutions or limiting credit card usage and avoiding high interest loans rates. Monitoring late payments quickly can keep your business financially sound – even the most lucrative businesses may face cash flow difficulties without proper management in place.
4. Explore Alternative Financing Solutions
Failing to have enough cash reserves can quickly lead to major issues for a business that cut into profit margins or eclipse profitability altogether. Not having sufficient savings reserves also puts additional pressure on small business owners as this scenario creates unnecessary stress and financial pressure that drains personal savings quickly.
Businesses looking to boost their cash flow now have viable alternatives to bank loans that may provide better outcomes. Alternative lenders use different criteria and data points when making funding approval decisions that could prove advantageous for your company.
Accurate forecasting and monitoring of cash inflows and outflows are crucial for navigating through difficult periods in business. Improving accounts payable/receivable processes with timely invoice processing, negotiating payment terms with suppliers and streamlining cash collection through digital payments can speed up accessing funds faster. Reducing unnecessary expenses to improve margins is another method of maintaining healthy cash flow balance – take a careful look at your spending to identify areas you can cut without negatively affecting quality or productivity!
