Cash flow is not only the lifeblood for your business; it’s absolutely essential for its viability and growth. According to a U.S. Bank study, a whopping 82% of businesses that fail do so because of cash flow problems. Unfortunately, more often than not, small businesses will encounter issues with their cash flow. Whether it’s due to larger expenses, slow-paying clients or seasonably slow sales, a cash-strapped business is left with minimal options when money is tight. Fortunately, with small business lending, businesses can find alternative and immediate solutions for their financial needs.
According to a U.S. Bank study, a whopping 82% of businesses that fail do so because of cash flow problems.
However, is there a way to avoid catastrophe altogether? While the occasional “surprise” incident or economic challenge may be unavoidable, there are ways in which small businesses can manage their cash flow with smart and preventative practices. We’ve listed and described five tactics that can help small business stay ahead of cash flow problems, get paid from clients faster, save money for rainy days, and maintain efficiency. Our goal for you to be able to acquire the immediate cash flow you need for long-term success with the following best practices.
- Invoice quickly and ensure the payment terms are clear. Just think to yourself: the sooner you send the invoice, the sooner you’ll get paid! Prepare and send off your invoices immediately following the completion of the job or sale. Waiting to send invoices not only creates the perception that you don’t need the money immediately, it also slows the process of future payments. Another way to stand firm on payment terms and expedite the process is through incentives, like payment discounts. Many business owners find that charging interest or a penalty for late fees creates a sense of urgency from the client, driving them to pay faster. The most important thing is to make all of your payment details clear, from the due date, to the payment methods, to the repercussions of late payments.
- Create the payment expectation with the first invoice. As with all first impressions, you only have one chance to show your customers how you expect to get paid for your services or products. Make sure you set a good first impression! Many small business owners find that reaching out to their customers and walking them through the first invoice is beneficial to not only receiving payments but also to enhancing the business relationship. Following this, they maintain contact by following up a few days before the invoice is due to set a reminder and ensure that the invoice was approved. Once the invoice is paid, they call their customers and thank them for following the payment terms. With this expectation in place, the customer learns how to pay you on time and by your terms.
- Use online invoicing. In a previous blog, we provided a list of a few of our favorite online financial management tools for small business owners. Online invoicing, sometimes called e-invoicing, makes the process of invoicing much simpler. With the myriad of online invoicing options available, small business owners can easily create and send invoices, track time, manage their expenses and get paid online. Many softwares, like Freshbooks, also have the capabilities that allow you to track invoice communication, so that you know when your invoices are sent, viewed, and paid. If you know that an invoice is viewed, you know that your client has seen it, and that it has not gone “missing” or “forgotten.”
- Take advantage of technology. There are so many online resources for both operational management and financial management. With the onset of softwares and applications, small business owners can now manage their cashflow and finances with easy-to-use, inexpensive, and secure digital tools. Tasks like accounting, bookkeeping, invoicing and payroll no longer need to be tedious and time-consuming. Even platforms like Dropbox and Google Drive can be a location where you store and keep track of cash flow spreadsheets. With these tools, your finances are kept secure, up-to-date and automated.
- Be realistic. When running a business, of course it’s a strength to stay positive and hopeful with new business leads and potential opportunities. However, when it comes to managing your cashflow, you have to stay realistic. Pay on the revenue that you have, not on what you hope to make. Make payments, purchases and payroll based on what you actually have in the bank. This will keep you mindful about what you are able to spend and how you should be budgeting for maintenance and future growth.Studies over the years have shown that cash flow problems are usually the leading cause of failures for businesses. According to a study from Equifax, “bankruptcies among the nation’s 27 million small businesses leaped by 81 percent between June 2008 and June 2009. While the U.S. Small Business Administration (SBA) estimates that about 600,000 new small businesses are launched each year, a 2007 study reported in the U.S. Bureau of Labor Statistics’ Monthly Labor Review indicates that two-thirds will only survive two years, 44 percent survive four years, and 31 percent survive for at least seven years.”
Cash flow problems may arise whether you have good management practices or not. Fortunately, small business funding is always available as a safety net.
It does help to effectively manage your cash flow in order to prevent business failure. However, cash flow problems may arise whether you have good management practices or not. Fortunately, small business funding is always available as a safety net. With funding from a third party lender and these five best practices, your business will have a stronger chance for long-term success!