Small Business Cash Flow is Vital to a Venture’s Long-Term Success or Failure
Owning a business can come with many incentives: financial independence, a flexible schedule, community support, job creation and so much more. But, it also comes with risks. A big one is cash flow. According to a study performed by Jessie Hagen for U.S. Bank, 82% of small businesses fail due to poor cash flow management.
Additionally, business analytics platform CB Insights cited a startup’s inability to properly manage cash flow as the number one reason for its demise. Such statistics highlight the critical importance of successfully managing cash flow for small businesses.
What is Small Business Cash Flow?
Small business cash flow is the movement of funds coming in (revenue, income) and going out (expenses) of your business’s bank account. If the expenses exceed the revenue and income (negative cash flow), your venture may struggle and, ultimately, fail. However, if income and revenue outweigh expenses (aka positive cash flow), your business has a greater chance of success.
When determining your small business cash flow, it’s important you understand the difference between accounts receivable (AR) and accounts payable (AP). Accounts receivable tracks the amount of money coming into the business.
AR typically accounts for the money customers pay you for your products or services.
AP refers to your company’s liabilities. This includes the money that is leaving your business and what you owe. This can include business loans, credit card payments, operating expenses and utilities, payroll and more.
Why Managing Cash Flow is Important
Managing cash flow should be a top priority for every small business. The state of your cash flow can make or break your business in the short and long term. Maintaining positive cash flow is integral to growing your business and meeting your financial commitments. Ensure you have enough cash on hand to pay bills as well as improve business operations with strategies such as new construction, equipment purchases, marketing and advertising, staffing and more.
If you can’t easily get your hands on cash, it’s going to be difficult to pay loans or bills on time, leading to late fees and additional interest. Cash flow is also one of the major financial health factors lenders will review to approve or deny a loan. If your business demonstrates positive cash flow, there’s a higher probability of securing a loan.
Although managing cash flow is such an integral aspect of any business, it is not an easy feat. Not only should you aim for positive cash flow, but also you should attempt to control the pace and timing of that cash flow.
Ensure AR is receiving payments on time. Ensure AP has enough cash on hand to put money aside for all expenses – both expected and unexpected expenses. Essentially, AR and AP must be in sync so that income entering the business is ready and waiting to exit the business when needed.
5 Tips for Improving Small Business Cash Flow Management
Here are some excellent tips for small business cash flow management:
- Understand the Cash Flow Cycle
The cash flow cycle runs from the time an entrepreneur purchases the materials necessary to create a product or provide a service, and it runs through the time of the collecting payments. Keep track of your income, expenses and the cycle by using cash flow statements. Review those documents to adjust any inconsistencies or potential cash flow problems. For instance, you may need to collect payments earlier in order to pay a bill.
- Ensure Customers Pay on Time
Although it may be uncomfortable to ask customers for payment, be proactive about it. To avoid awkward conversations, automate the payment process with invoicing software, such as QuickBooks for small businesses, or send email reminders. If these don’t work, you may have to pick up the phone or contact a collection agency.
- Turn Over Inventory
To improve your cash flow, turn your inventory more quickly by increasing sales. Cutting down on the amount of money you have tied up in inventory frees your businesses’ cash.
- Negotiate with Vendors & Customers
Negotiate with the accounts receivable and payable of other companies. For instance, you can request shorter payment terms with your customers or longer terms with your vendors. It never hurts to ask!
- Consider Invoice Financing or Cash Flow Loans
There are additional ways to manage your cash, including invoice financing and cash flow loans. Invoice financing involves working with third-party companies to obtain an advance (total or partial advances) on outstanding invoices. A cash flow loan is typically a short-term, high-interest loan or line of credit business owners use to cover expenses.
Using these tips and strategies will go a long way in helping you improve your small business’ cash flow. Just remember: This is never a “set it and forget it” endeavor. Properly managing cash flow requires constant oversight and discipline. But the fruits of that labor can be significant!
About Extensia Financial
Established in 1998 and headquartered in Simi Valley, CA, Extensia Financial offers competitive commercial real estate loans. We partner with credit unions and connect them to investors across the United States. Additionally, we uniquely support and guide our partners through the entire loan process. Extensia Financial is a proud member of the AVANA Family of Companies.