If you want to have the best chance at success as a small business owner, then it’s imperative to take good care of your finances. This doesn’t just mean profit - you need to make it a priority to keep cash in the bank. It’s difficult to grow your small business when you’re continually running out of funds. In this article, we’re going to share five tips to help you manage your cash flow so that you can continue operating smoothly and plot a roadmap for steady growth.
1) Calculate Days Cash on Hand
Most business owners keep a close eye on their chequebook and make quick decisions about what they can and can’t afford. However, the reality is that there are always expenses coming up, like it or not. You need to know how long you have before cash runs out in order to make informed decisions about which purchases are truly necessary, and which can wait.
Days cash on hand refers to the number of days that your cash will last you if you make no new sales. The more days cash on hand you have, the greater your financial cushion. 15 days or more gives you a small buffer but you should aim to have at least 45 days cash on hand.
2) Keep an Eye on Payment Terms
When you have a contract with a large company with net 60 or 120 payment terms then you won’t be compensated for several months after work is completed. This can be a serious threat to your cash flow, so consider renegotiating payment terms with your existing customers to improve your situation. Going forward, make it a priority to negotiate payment terms up front when signing new clients.
On top of this, you should keep an eye on how long it takes each customer to pay and collect data on the average number of days to collect. You should aim to reduce this figure as much as possible by sending reminders and introducing early payment incentives or late fees.
3) Understand Customer Concentration
Customer concentration is the proportion of your revenue that relies on a small number of customers. This figure is a good indicator of how stable your business is, and can thus inform your next financial move.
You have invested lots of time and money into your business, so don’t let one or two customers control the fate of your company. If one customer is late to pay you, the consequences could be devastating for your business. It’s important to keep a close eye on your customer concentration and ensure that you are supported by the right amount of customers.
4) Slow Your Outflow
Naturally, your vendors want payment as soon as possible. If you’re a diligent and financially conscious business owner, then you may think it’s a great idea to pay them as soon as possible, but in reality it may be worth delaying a little. It’s important to meet the terms of sale and pay on time, but if you have 30 days to pay, then consider paying on day 28 rather than day 2. This gives you a chance to get more money in the bank before paying out and helps to create a bigger financial buffer.
5) Build Relationships with Lenders
It’s far easier to borrow when the going is good. Trying to secure a loan when your back is against the wall is no mean feat, and will usually result in high rates of interest. It’s a good idea to organise a line of credit and business credit card when the going is good, as you won’t pay any interest until you actually need the money. Making connections with lenders early on in your business, rather than waiting until you actually need help, is a good way to protect yourself against future cash flow issues. After all, he who has the gold makes the rules.
Summary
Healthy cash flow and an ample reserve is the backbone of any business. It provides stability and security, as well as maximum opportunity for growth. Perhaps even more importantly, good cash flow management ensures peace-of-mind so you don't have those late night worries about not being able to pay your employees tomorrow morning.