Running out of money is one of the biggest concerns for a small business owner, and unfortunately, it’s one of the most common. It’s also a common misconception that cash flow problems occur when companies are doing poorly, but these problems can happen to small businesses that are doing well too. Sometimes it can even happen because they are doing too well.
There are a variety of reasons why small businesses can run out of cash. A few common culprits are:
- Your sales are not high enough
- You’re not collecting money customers owe you
- You don’t charge enough to cover your expenses
- You’re spending too much money running your business
If you find yourself in any of these situations, you could be at risk of running out of cash for your business. But you have more options than you might think.
How to Improve Your Business Cash Flow
With the right processes and some adjustments, you can put your businesses in better financial health. We’ve done some research and found five options to help your business avoid running out of cash.
1. Re-negotiate With Vendors and Suppliers
Have you taken a look through your vendor or supplier contracts lately? The contracts you have in place were most likely established when you launched your business and were just trying to get started. You may have accepted their terms without negotiation so you could start selling right away.
Now, it’s time to return to those original contracts and look them over. Give your vendors a call to renegotiate the contract terms. Maybe there’s an opportunity for a discount after a certain number of years of partnership. Remember that you are your vendor’s customer and they want you to be successful — so don’t be afraid to negotiate payment terms and schedules to benefit your own cash flow.
2. Offer Customers Different Payment Options
Are your customers paying too slowly? If you work with larger companies, they may be used to paying their invoices 30 or 60 days out. But many small businesses can’t wait this long for payment since they have finances of their own to consider.
In an effort to avoid running out of cash as you wait for slow payments, offer your customers a discount for paying early. For example, a discount of even 2 percent could be an incentive for customers to pay sooner. Another option is invoice factoring, where a third-party factoring company advances funds to your business for a fee. The transaction closes when a customer pays the entire invoice. This is often used as a revolving line of financing, and is also a common way to improve cash flow.
3. Borrow Carefully
If you are in a major cash crunch, securing additional financing may be one of your best options. There are many factors to research when looking to get cash this way, such as the right interest rates, repayment terms and qualifications for your business.
One option is a small government loan, such as a microloan from the Small Business Administration (SBA). The SBA provides loans of $50,000 or less to small businesses that need money to grow or pay their bills. Microloans can be easier to get than traditional financing and are available to businesses that haven’t been doing business for long.
There are also alternative loan opportunities available from many providers online. Alternative lending gives small businesses a financing opportunity they may not otherwise have because of a poor credit score, no assets or minimal business history. If you have stellar credit and several years as a business, you can go to the traditional financing route, too. Just make sure that whatever decision you make is well-researched and will have a net positive impact on your company in the long term.
4. Diversify Your Client Base
Simply put, if one customer accounts for 50 percent or more of your incoming revenue, you are in dangerous territory. Even if you have a wonderful relationship with this customer, there are many risk factors involved with stakes that high.
For example, at any point, your customer could go to a competitor with better rates or a better product. You can protect your company and avoid running out of cash if you diversify your client base. Instead of relying mostly on a single revenue stream, your business is more secure with several customers of varying sizes.
5. Monitor Your Cash Flow
Staying on top of your finances is a fundamental part of running your business. Your cash flow statement shows money coming in and out of your business and how it will affect your cash on hand, assets and operating budget.
Learning how to read a cash flow statement is critical to help you understand how financially secure and viable your business is. It will also help you manage short-term debt and pay your bills. If you feel you need to shore up on financial management, there are plenty of blogs, seminars, and classes out there to help.
Build a Cash Reserve
Building a cash reserve is an incredibly effective way of solving future cash flow challenges. If you find yourself running out of cash, your cash reserve will give you some breathing room to solve the problem.
As soon as you company begins making sales, save some money into a separate bank account. Although this seems simple, it can be difficult for some small businesses because it seems like “wasted” cash — just money sitting in a bank account that you can’t invest into the business. And the reality is that building a cash reserve may slow down the growth of your business…but it will also give you a safety net you can use if your company runs into any problems.
Cash is king; to stay viable, your business cannot run out of cash. Many cash flow problems can be solved if caught early enough using the strategies above. If you find yourself running out of cash, follow the above tips to help stimulate growth. And don’t forget to brush up on your financial management and start a cash reserve (if you can).
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