Managing Your Cash Flow: A Key Element of Small Business Survival
By Giovanni Coratolo, U.S. Chamber of Commerce’s Director of Small Business Policy
Unfortunately, some small business owners’ cash flow plan is to occasionally glance at the company’s checkbook balance. Here are some tips to help you take control of your cash flow:
Anticipate Revenue Fluctuations—Seasonal revenues or extraordinary one-time events that impact sales may lead to large cash swings. The time disparity between when the payables become due and when the receivables are collected, and the transition from a robust level of sales to a moderate one, can affect your cash flow. Never divert funds for other purposes when revenues are declining until the payables associated with those revenues have been satisfied and inventories have been replenished.
Implement an Accounts Receivable Plan—Be aggressive in collecting quickly and set up a plan to do so. If you have to invoice the customer, consider adding a penalty for lateness. Accepting credit cards at the time of sale is a convenience for many customers.
Manage Your Growth—It would seem contradictory that you could go broke while experiencing accelerated growth, but it often happens. Increased investment needed to fund rapid expansion rarely keeps pace with the cash flow generated from sales. Infusions of capital are generally needed to sustain high growth rates.
Create and Review Monthly Cash Flow Reports—Insist on monthly cash flow reports, whether they are self-generated or provided by an accountant. Have a Cash Contingency Plan—Have a backup plan in place, such as a line of credit, for unforeseen cash shortfalls.
Review Banking Procedures—Banks have different procedures on when deposits are credited and how long checks take to clear. It is wise to understand these procedures and how they may affect your cash-handling requirements.
Finance Extraordinary Expenses—Expenses such as liability insurance occur once a year. It is worthwhile to finance these types of expenses over the corresponding revenue stream in order to avoid large swings in your cash flow.
Always Pay Taxes Promptly—It is a common mistake for business owners to make up a cash shortfall by delaying the payment of taxes, especially payroll taxes. The interest and penalties for this are enormous.
Inventory Management Plan—Just-in-time inventory and the elimination of slow-moving product lines are two examples of strategies that can have a positive cash flow effect, but they require sophistication to implement.
Remember, cash is king! With it your business will thrive. In contrast, unexpected shortfalls can instill doubt in the minds of your employees and vendors about your long-term financial viability. It is good business to implement sound procedures before encountering a cash crunch in your business.