Carefully watching cash flow is one of the chief functions of your financial staff. However, unforeseen disruptions to the economic landscape can quickly change your cash position from positive to negative.
COVID-19, for instance, precipitated a financial pandemic. Small business owners suddenly found their businesses closed or hours curtailed. Revenue plunged. It may not be possible to prepare for such an event, but there are strategies you can routinely employ to maintain healthy cash flow.
Why Does Positive Cash Flow Matter So Much?
The net amount of money coming in and going out of your business each month, is your company’s lifeline. If more cash is going into the bank than going out, you have positive cash flow. If more cash is going out than coming in, you have negative cash flow.
- Poor cash flow: This impacts your ability to pay your employees, vendors, creditors, and other expenses
- Credit history: If you fall behind or fail to make debt payments, your credit history will be negatively impacted, making it challenging to secure financing in the future.
- High outflows: These prevent you from taking advantage of opportunities to grow your business or make investments in your facilities and may force reductions in critical expenses such as your marketing and advertising budget.
- You could go out of business: If you don’t take action to restore your positive cash balance, How Can Businesses Improve Cash Flow?
5 Steps to Streamline Your Cash Flow
There may be brief times when you experience negative cash flow. If you have money in the bank, you can weather a storm for a couple of months. Implement strategies such as tracking, invoicing, and forecasting to improve your performance and overall cash balance.
Keep Careful Track of Incomings and Outgoings
One of the chief causes of cash flow problems is unpaid invoices. The faster you get invoices to customers, the sooner they will pay you. Take advantage of accounting apps such as Zoho Books, FreshBooks, and QuickBooks Online to speed up the preparation and submission of invoices.
Accounting apps can also help you generate profit and loss (P&L) reports. A P&L report can help you save money by identifying expenditures that may be out of line with revenues and weighing on profitability. For instance, certain vendors may be charging more than you can afford, highlighting an opportunity to negotiate a better price or find a new vendor.
Focus on Accounts Receivable
If you continue to have cash problems due to unpaid invoices, consider accounts receivables financing such as invoice financing or invoice factoring.
Invoice financing works like a cash advance. Your accounts receivables serve as collateral for a percentage advance of the total outstanding, typically 50-80%. When the customer pays the invoice, you pay that amount to the invoice financing company.
Invoice factoring is similar to invoice financing, except that the invoice factoring company takes control of your accounts receivables. Another option is to apply for an invoice-backed line of credit with accounts receivables serving as collateral. Once receivables are paid, you can repay the line of credit.
Forecast Cash Flow and Build Projections
Reliable forecasting enables you to anticipate potential problems and take corrective action. For instance, your business may be seasonal, meaning slow revenues during certain periods. How will you meet your obligations to creditors and cover operating expenses during the slow periods?
Your cash flow forecasts should include three essential elements: an estimate of your likely sales, projected schedule of payment, and anticipated expenses. When you compare actual income and expenses with what was forecasted, you can identify the areas of your business that are underperforming and take necessary actions.
Your projections should include funding strategies to improve cash balances, such as invoice factoring, invoice financing, or securing a line of credit.
Pivot the Business Plan
Being prepared to pivot should be one of the top elements of your business strategy. Markets shift, customer preferences change, a pandemic can occur. By continually tracking your income and revenue, and analyzing your projections, you will be ready to handle disturbances in the marketplace.
If you have utilized all the tools discussed and still find yourself unable to generate positive cash flow, it might be time to pivot and reorganize your business operations. Ask yourself the following questions:
- Is there a way to scale your business to increase offerings without increasing costs?
- Would it be more cost-effective to outsource some of your operations?
- Are those long-term relationships with vendors worth the price?
- Is there an underperforming product line?
Explore Financing Options
Short-term financing is one way to maintain working capital when you experience cash gaps. Here are some options.
- Open a business line of credit at your bank: You can repay the borrowed amount when your cash position is healthy again and only pay interest on the amount drawn. A line of credit is perfect for balancing seasonal disruptions in income
- Leverage alternative loan options: Lenders like OnDeck offer business term loans up to $250,000 to cover cash flow gaps. You need a minimum credit score of 600. Another option is BlueVine which offers short-term loans, lines of credit, and invoice factoring. You need a credit score of at least 600 and six months of business history.
Temporary periods of negative cash flow can be survived. However, if this is a trend, you could find yourself on the road to business failure. Taking proactive action is the best way to maintain a positive cash position. Utilize digital tools, monitor your expenses and revenue, and consider short-term financing to reverse any outflows that continue to outpace inflows.