A common mistake new business owners often make is only worrying about cash flow when reserves are getting low. When businesses are hurting with cash flows, it isn’t usually getting paid that is the issue, it’s when they’re getting paid. Inconsistent payments can lead to missed payments for bills, delayed employee paychecks, and/or a halt in your growth from inventory problems and not being able to satisfy all of your customers.
Here are three recommendations on how small businesses should think about cash flow so that they don’t find themselves ill-prepared for circumstances that may arise:
- BE FORWARD THINKING
If you’re a small business owner, there is no doubt that you feel like there is never enough htime in a day. We know that small business owners are some of the busiest people on Earth, and that is why think that wasting time fixing cash-flow problems should not be something you spend a lot of your valuable time on. You should be able to spend your time focusing on growing your business and expanding, which is why we suggest having working capital in place to give you some buffer room in your cash-flow situation. This working capital could be for a cash reserve, or a funding source that you can quickly and easily draw from as need-be.
It doesn’t matter if you are a small or large business; Your time is best well spent in the thick of the business, ironing out day-to-day operations and managing your employees. You don’t want to catch yourself spending hours in your office figuring out cash-flow problems.
We suggest having working capital in your back pocket for the same reason people suggest not going grocery shopping while you’re hungry. If you’re hungry, you’re more likely to be less concerned with price and make decisions you might not normally have made. If you’re hurting for cash because you weren’t forward thinking, you might be inclined to take financing from somewhere that doesn’t offer you the best terms and rates because you need the money now. Being forward thinking puts you in the best place for any future situations that arise where your company might need money in a pinch,
- EXAMINE NET GAIN FROM FINANCING
We highly recommend seeking financing instead of turning down business or delaying your payroll. Looking for a working capital loan to cover these short terms loans is almost 100% of the time a better decision. A common mistake new business owners make is making decisions about financing based on short term costs. However, not paying your employees will have a huge moral hit and could give your company significant problems with the employees attitudes. Additionally, denying business because you can’t afford the new customers will just hurt your businesses bottom line an could taint the customer perception of your company as a whole. This is why we suggest weighing all of the costs of not taking financing, such as the moral implications and future issues, before simply denying a short term loan because it seems to cost a lot. Short term pain that can be overcome in the long run is way more ideal than the longer term issues that could arise from decisions you must make because your cash flows are struggling.
- KNOW YOUR OPTIONS
Seasoned business owners know that a short period of poor cash flow can be a disaster for a small business. The best solution is to find financing options before a crisis hits.
Below are three possible financing options for managing your cash flow and growing your business:
- Provide a vendor discount. Many businesses offer clients a discount for paying invoices before the due date. Giving a 2 percent discount for invoices paid within 10 days is common practice and will incentivize clients pay their invoices ahead of time, helping to free locked-up cash. One disadvantage is that you still won’t be fully in control of your cash flow — your customers will be.
- Checkout a business line of credit. A business line of credit lets you draw funds as needed, so you always have a ready source of cash to tap into when there is an expansion opportunity or a dip in cash flow.
- Utilize invoice factoring. Invoice factoring companies offer financing tied to business invoices. The result is a credit line, like a business line of credit, except that because it is tied to specific invoices, you usually get good rates.