For SME’s and startups, running out of money can be catastrophic. A lack of understanding of cash flow and poor cash management is the most frequent reason for small business failure. In fact, a recent study by U.S Bank found that 82% of businesses fail because of cash flow problems.
Cash is king when it comes to the financial management of any business. Without cash, profits are meaningless. Though cash flow management is extremely important for all businesses, it’s critical for SME’s and early startups. If you can’t manage your cash flow within the first year, you will most likely not survive past the second year.
There are many causes of cash flow issues. This may be caused by low profits, too much stock, stagnant inventory, seasonal demand or dismal debt collection. To help you avoid becoming another statistic, here are some smart tips to fix your business’ cash flow problems.
Leverage Latest Technology
Fortunately, for startups and small & medium-sized businesses struggling to get a handle on their cash flow, an increasing number of financial technology, or Fintech are entering the scene. There are an innovative range of digital software and tools that are not only helping SMEs keep cash flowing, but also improving the quality and efficiency of day-to-day accounting and financial tasks.
If your cash flow is suffering, you must invest in the new technology. There are several ways these innovative tools can help your business manage and improve cash flow, so you can start thinking less about surviving and more about thriving. Save your spreadsheets in the cloud sites such as Dropbox or OneDrive and make good use of accounting software, so you can easily stay on top of your cash flow wherever you are.
Besides that, use cash flow forecasting and management software such as PayPie, to get an accurate picture of your past, present and future cash flow. This futuristic app helps you seamlessly create a scenario, estimate the money you expect to flow in and out, and see what your future cash position would look like, so you can make better financial decisions and plan for potential problems before they cause a cash crisis.
Improve Your Account Receivable Collection
Consistent late payments from customers are one of the common causes of cash flow problems. To avoid late payments, it’s vital to improve your cash flow by smartly managing your receivables. A good rule of thumb is to encourage customers to pay up faster with which you can take control and close the gap between invoicing and payment.
Following are the techniques to speed up your invoicing:
- Invoice as early as possible and follow up immediately to guard against late payments
- Consider offering special discounts and deals to customers who pay their bills rapidly. You can give a 2% percent discount if they pay within 30 days instead of 90.
- Keep payment terms short and simple – let your customers know when you’re expecting your payment.
- Don’t feel bad about asking for payment – send a reminder a week before the due date and regular reminders until the invoices are paid.
- Keep your payment options as flexible as possible.
- From emails to Fax, SMS, and IVR reminders, use all means of communication.
- Keep the design of your invoices neat and clean – include important details, payment preferences and terms (with links if possible), easy-to-read content and so on.
Delay Your Payables
The best way to manage cash flow is to shrink and minimize your payables. Though there are a lot of benefits to pay early, try to extend your payable as long as possible. If you owe supplies but don’t have adequate cash in the bank, you’re going to lose the opportunity and potentially damage your supplier relationship. Not having money to buy inventory and materials can interrupt your entire operation.
However, delaying payments to your vendors can incur additional late fees, so make sure you pay before the due date to avoid being penalized. Some simple ways to cut business cost are:
- Reduce supply expenses by purchasing from large discount suppliers
- Cut off all unnecessary expenses that increase outflows
- Buy used and sell idle equipment
- Barter products for supplies and services
- Create and stick to a business budget
- Ditch your landline and go paperless
- Reduce credit card debt
- Cut staffing expense
- Start marketing your business online
Consider Adequate Small Business Financing
From increased interest rate to missed opportunities, poor relationship with supplies, stress, solvency and restricted growth, inadequate working capital can affect your small business in a variety of ways. Hence, it’s significant to have enough money to finance your business over a while.
Fortunately, there are many small business financing options that can solve your cash flow crisis. Short-term financing such as a line of credit and long-term financing such as equipment funding and traditional bank loans can be used to make important purchases or to bridge the gap between payables and receivables.
Though the organic method is the best way to improve your cash flow i.e boosting revenue from sales and minimizing expenses using less cash. Sometimes, however, your business fails to make a positive cash flow even after giving your best. This is the time when you need to consider business funding to improve your cash position.
Managing your cash flow in the best way possible is important to ensure that you are ready to face all the future uncertainties and able to focus on what’s important for your business. Working capital is the fuel on which you drive your company’s performance, growth and success. By understanding and applying the above tips, you’ll be better prepared to manage your cash flow, in turn, maintain and grow your business’ operations.
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