How to Overcome 4 Common Cash Flow Problems for Small Business

By: Dave Kramer Wednesday October 14, 2015 comments Tags: cash flow, tips

Entrepreneurs who have a solid grip on cash flow are far more likely to survive the tumultuous first few years of starting a business—it’s a life-or-death issue for a new business. Cash flow is so difficult to manage because it relies on so many different factors, many of which you can’t control.

The key is accurate, timely, and thorough reporting, so you can make accurate predictions based on data from what has happened before, rather than on guesswork. Here are my tips to overcome the 4 most common cash flow problems for small business owners.

1. Focus on Cash Flow, not Profits

Cash flow is the “flow” of dollars in and out of your business. It’s about timing more than quantities—you need to have the amount of cash in your business accounts to cover your expenses when they’re due.

Understand Profits vs. Cash Flow

Your business’s profitability is calculated by subtracting your expenses from your revenues. Profit is an on-paper measurement that doesn’t take into account certain realities, such as late payments, timing of bills, or future growth.

You can be profitable and still have a serious cash flow problem, which can stunt your growth and prevent you from becoming more profitable in the future. So your profit margin is the war, and cash flow is the daily battle that determines if you fight another day.

Profit margin is the war, & cash flow is the daily battle determining if you fight another day
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Focus on Timing

To get a good handle on cash flow, you need to have a sense of when cash will be coming into and flowing out of the business on different time scales. Plan for the year, the quarter, the month, or even shorter time frames to make sure you aren’t caught without the cash you need.

There are tons of worksheets online that can help you plan the timing of your cash flow. SME Toolkit has a great resource—click here to check it out.

2. Find a Solid Sales Process to Manage Pipeline and Invoicing

This is one of the biggest factors in ensuring healthy cash flow, and also one of the trickiest to master. Business owners set sales processes to accurately estimate when sales will be closed, how much will be earned in revenues, and when those checks will actually come in.

Having those predictions dialed in will make it abundantly clear when in the year, quarter, and month you have relatively abundant cash, and when things are going to be especially tight.

Invest in Sales Pipeline Software

To really organize your sales process, I recommend using a sales pipeline—software that helps manage your leads, predict close dates, and plan for future revenue. As you use most sales pipeline tools, they will gather data that will help you make more and more accurate projections the longer you use them.

But for the first few years in business, you might not have enough data to draw on. There’s no easy answer to this; the best advice I can give is to be extra conservative when you’re starting out, and if possible, to work with a mentor who can help you make predictions.

Automate Invoicing

“Profit is an opinion, cash is a fact,” as Victor Clarke of Clarke, Inc. put it in this blog post. Cash is only factual when it’s actually in your account.

That makes invoicing possibly the most important part of your sales process. The faster those invoices get out, the more likely you are to get paid on time—you’ll still be top of mind. That’s why I recommend automating invoicing with a tool like AllProWebTools.

Collecting Payment

To avoid late payments, you might want to try incentivizing early payments, charging late fees, or collecting deposits before starting work. If you do a job on credit, or accept a net-30 or net-60 contract, make sure you can trust that person, or you could end up in a bad cash flow situation.

Inevitably, payments will be late, and you’ll have to be proactive to collect on them. If confrontation isn’t your strong suit (whether you don’t like doing it, or don’t know how to do it nicely) it might be most efficient to delegate collections to a persistent, trustworthy team-member. Put a process in place for collections, and stick to it.

3. Meticulously Track and Budget Expenses

Expenses are the flip side of the coin—just as important, and just as tricky to track.

Schedule Your Payments

You need to know more than just the total expenses of your business to plan for good cash flow. It’s just as important to know when in the cycle bills are due, the nuances of your payroll and supplier expenses, and the schedule for future growth-related expenses.

Try to account for every cost, no matter how small, and schedule payments around cash inflows.

Manage Vendor Relationships

Most businesses have a number of vendors they pay bills to each month, including software, inputs to their product, and much more. Choosing these vendors is very important. Flexible payment terms might be more beneficial to your business than the lowest possible price.

The relationships you have with these vendors can make a big difference to cash flow. Communicate your financial situation and cultivate a strong relationship so that if you ever have a shortfall, they’re likely to be more understanding.

4. Have a Plan for Shortfalls

Nearly every business falls short sometimes. This is when the relationships you’ve cultivated become crucial. In particular, having a line of credit and a good relationship with your banker BEFORE trouble arises could keep your head above water. As I said above, your vendor relationships become key at this point as well.

With shortfalls, the earlier you can predict them and start controlling the damage, the more likely people are to help you out. This is why it’s so important to keep an eagle eye on both your cash inflows and outflows—it could help you spot trouble early.

Click here to access a free resource explaining how an all-in-one toolkit can smooth out your business’s cash flow and spot trouble early!