Cash Flow Management: 6 Tips for Small Businesses

Cash flow management is one of the most important skills for small business owners to master. It can also be one of the toughest, especially when you’re just getting started and cash flow may be tight. Here are some tips that can help.

1. Figure out your monthly money needs.

It’s important to know how much money you need to survive-both for you personally, as well as the business. First, figure out how much money you need to live on; to start, plan on taking just that much out of the business. Next, figure out how much money your business needs for rent, utilities, employees, or any other expenses required to stay afloat. Once you know these two figures, you’ll have a baseline to work with. Budget carefully, and put some money aside as an emergency savings fund for when the unexpected pops up in life or business.

If you’re just starting out and have no firm numbers yet, err on the low side for income and the high side for expenses. It’s better to be too conservative than to wind up short. You may decide it’s more prudent to grow your business before rewarding yourself. Once you’re a bit more established and have a track record for making money, you’ll have plenty of time to give yourself a raise.

2. Map your cash flow patterns.

Most businesses have some kind of pattern of income and expenses. Next, you’re going to learn what your business’s cash flow patterns look like. Once you’ve completed step one of figuring out your monthly cash needs, you’ll be better able to tackle step two as you watch the numbers month-to-month and make any adjustments using real data. Accounting software can help you visualize your cash flow with easy-to-generate reports.

Knowing your cash flow pattern can help you put together sales and revenue forecasts, and anticipate what your receivables and payables will look like so you can plan accordingly. Being able to anticipate your cash flow will also help you make any necessary adjustments before things get out of hand. You don’t want to wind up with too much cash on hand that could be working for you, or, of course, too little.

3. Keep your operation lean.

It can be tempting to want the best office space, the newest equipment, and the biggest staff. Resist the temptation. Your business will thrive because you offer a superior product or service, not because of what the back office looks like. Make do with whatever you can. Stretch yourself before hiring people. If you have employees, make sure everyone is as efficient as they can be.

If and when you have to borrow money to grow, take the least amount you can to meet your objective. Make sure you can handle the payments on that loan before you take any more, or you will find yourself, at best, in a vicious cycle, and at worst, defaulting and going out of business. Borrowing and paying back smaller amounts will also help your credit rating, allowing you to qualify for lower interest rates in the future.

4. Get the right kind of loan.

If you’re going to borrow, do your homework. There are many options available, and some can be more harmful to your business than helpful. Educate yourself about “quick fix” products like payday loans, alternative lenders, and cash advances. Steer clear of loans that penalize you for paying them back early.

5. Save where you can.

In addition to keeping your operation as lean as possible, take advantage of money-saving opportunities whenever possible. Some vendors offer discounts for paying invoices early. If your cash flow can handle it, you could save a few percent, which adds up.

If your business doesn’t rely on state-of-the-art equipment, buy quality used products. Refurbished computers and electronic goods usually have the same warranty as new, but cost a fraction of the price. Used office furniture is also a bargain. Check Craigslist and Freecycle, and you may even be able to find things at no or very little cost.

Get a business credit card that comes with some kind of rebate or points program so there’s an additional benefit to making purchases with it. Of course, make sure that the card’s interest rate and other fees are competitive, and plan on paying off your balance each month. It also goes without saying that you shouldn’t buy things you wouldn’t already buy in order to get the rewards. Only make purchases you need and can pay for, and remember to keep your business and personal spending completely separate.

6. Get paid by your customers.

Sounds funny, right? Of course you’ll get paid! Yes, but not unless you make sure to keep proper records, send invoices out in a timely manner, and stay on top of your accounts receivables. Many small business owners are surprisingly lax about the paperwork involved with being paid for doing what they do.

It can be time consuming, and frankly, it’s not that much fun. Make it a priority, though, or you will soon find yourself behind and in a hole. If you don’t want to do it, hire a part-time bookkeeper to keep things on track. This small additional expense will pay off in a big way.