“Cash flow is king.” — Anonymous
Small businesses are the engine of our economy. They create jobs and drive commercial activities.
As a result, the government designed the tax code to provide businesses with favorable tax breaks. These tax breaks are incentives used by the government to encourage new business startups.
As a business owner, besides the tax breaks you enjoy, you get to be your own boss. You have flexibility to manage your schedule. You have the freedom to explore your creativity. And you get great fulfillment by serving your clients and contributing to your community.
But, getting a new business off the ground can be challenging. I know this based on my experience of running different businesses and working with many clients that run their own businesses.
Although the internet has made it relatively easy to start an online business, it is still challenging to be successful. It requires significant amount of work and the majority of new online startups still fail in less than one year. Very few make it past 2 years and fewer make it past the 5-year mark.
According to a CNBC report, one of the primary reasons businesses fail shortly after their launch is running out of cash.
So, if you’re considering starting a new business or if you started one recently, you must take steps to ensure your cash flow management is strong.
“Happiness is a positive cash flow.” — Fred Adler
Here are 7 tips to help you manage your cash flow.
1. Keep a healthy gross profit
Before you jump into any business, always have a good understanding of what your gross profit is.
Your gross profit is your gross revenue less all the direct costs required to provide the service or product you’re offering.
To have a profitable and sustainable business, you want to have a gross profit ratio of 50% or higher. This will provide you with a healthy positive cash flow that will benefit your business.
2. Keep your eye on cash-flow management
You start a business with the expectation of making a profit. As a result, you may be focusing excessively on profitability at the expense of cash flow. This is a mistake.
“Making more money will not solve your problem if cash flow management is your problem.” — Robert Kiyosaki
Understand that when it comes to business, profit is not the same as cash flow. While it is important to stay profitable, it is more important to have enough cash flow to keep you in business.
So, you need to maintain focus on cash flow and spending by watching it closely on a weekly basis. Not monthly or quarterly. Track your cash weekly!
3. Eliminate receivables or collect immediately
Where practical, eliminate receivable by getting paid upfront before delivering your service or product. With technology and many options to make payments electronically, it is easier to implement this.
If you are not getting paid upfront, make your invoices “due immediately” and limit the use of net terms longer than 15 days.
By eliminating or minimizing receivables, you will save yourself the trouble of keeping an eye on receivables and following up on customers to get paid.
4. Offer discounts to collect payments earlier
If you are unable to eliminate receivables and you run a business where you extend credit to your customers, you can offer your customers a discount if they pay early. By doing this, you get the cash quickly and avoid possible concerns with collections.
Ensure you clearly communicate guidelines that state their eligibility for discounts, and then enforce those standards strictly.
5. Always maintain a cash reserve
If you run a new startup, you will likely have cash shortfalls from time to time. Even when you have the best plans, sales may fall through the cracks, and expenses may be higher than budgeted.
When this happens, your survival will depend on how much you have in your cash reserve. By keeping a cash reserve for challenging times in your business, you will reduce stress, distractions, and stay focused on growing your business.
These days, a good option for a business is to set up a business operating line of credit with a bank.
“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.”— Peter Drucker
6. Extend payables where you can
Always consider negotiating with your suppliers and vendors to get the best deal you can and extend payables to net 60 or more, if possible.
Extending your payables will stretch your cash and keep your business in a healthy cash position.
7. Spend only on essentials
Cut spending and eliminate costs that are not essential to your operation. When you do this, you will conserve cash and ensure your survival in the short-term.
Keep an eye on upcoming and recurring expenses so you can plan for them. If you have to hire new staff, hire only when you absolutely need to and do so smartly. Hiring smart ensures you get a highly skilled staff that will likely do the work of two or more mediocre employees.
Conclusion
There will be more challenging times ahead for many businesses as the COVID-19 related restrictions are relaxed in many cities around the world.
As a result, it is important for new businesses to keep a close eye on their cash flow management to ensure survival in both the short-term and in the long-term.
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