5 Simple Ways to Even Out Your Small Business Cash Flow
Mismanagement of cash flow can be fatal to even the most prosperous small businesses. In reality, it is cited as one of the leading causes of small business failure. The sum of money moved into and out of your company on a weekly, monthly, or yearly basis is referred to as cash flow. This expense-to-revenue ratio depicts the company's financial success as well as its flexibility and "liquidity."
Although positive cash flow is an excellent target for any small business, continuous positive cash flow is far more critical. If you note peaks and valleys on your cash flow statements when analysing them, you have a problem. An unexpected expense that occurs at a time when your cash flow is poor can cause problems, as you do not have enough liquid assets to cover all of your recurrent and new costs. With that in mind, here are five things you can do to balance out your cash flow and provide yourself with a buffer to help keep your company afloat:
1. Obtain a Business Line of Credit
The business line of credit is one of the most common types of business financing on the market. Since a LOC is adaptable, you can keep it in your back pocket for use in an emergency.
A credit line is similar to a credit card. A lender provides you with access to a pool of funds. You can draw as much as you need (up to your credit limit), repay it according to your terms, and then draw again — or make several draws, each with its repayment plan. As long as you maintain healthy spending habits, you can continue to use your line as required. You will not be compensated if you leave the bar unattended. If you're short on cash, you can use your LOC to cover any significant, unforeseen expenses. You'll have to repay the principal and interest, but that's preferable to missing another payment or failing to make payroll that month.
2. Tighten customer payment terms
If you have the type of business where you extend trade credit to customers — giving them Net 30 (also known as 30 days) to pay you for your goods or services — you may find yourself with cash flow issues as customers use all 30 days (or more) to pay you for your work. There are a few ways you can tighten up customer payment terms, making sure customers pay you more quickly:
- Impose a late fee: Begin charging clients a small but visible fee for paying their bill after the due date. it reduces the number of times you would wait for payment.
- Offer small discounts for early payments: Even a small value (1-2 percent of the total) could be enough to persuade some clients (particularly other small businesses looking to cut costs) to pay right away.
3. Negotiate new terms with long-time suppliers
If you have vendors to pay for, it's time to take a step back to see how much you can (respectfully) stretch your payment terms.
This strategy would work exceptionally well with long-term suppliers with whom you have a strong relationship. If they are willing to wait an additional 15 or 30 days for payment, it may be helpful to let you extend your payment schedule to Net 45 or Net 60. If you don't ask, you'll never know how much money you might save or hang onto for a little longer.
4. Pay your quarterly taxes
New small business owners, especially sole proprietors, often assume responsibility for the company's accounting. If you do this, using tax software or a program to help you remain organized — and pay your quarterly taxes — may be beneficial.
Employers usually withhold and pay federal income taxes to the government. It is because the government dislikes having to wait for its income. When you're self-employed, the same law applies, so it's critical to read about and comprehend quarterly projected taxes.
Not only is it necessary to pay your quarterly taxes for legal reasons — you don't have to pay them per financial quarter, but you may face penalties if you don't — but you'll build a more stable cash flow plan if you make smaller payments over the year rather than one lump sum that can wipe out your earnings in one swoop.
5. Finance some expenses with a business credit card
A credit card is simply a short-term loan of no interest if paid off quickly. Some company credit cards offer 0% APR for a limited time (sometimes lasting more than a year). That is an interest-free loan for the duration of the deal. Paying with a credit card not only gives you a few extra weeks to pay off your purchases, but certain cards even provide you with different rewards, such as purchasing protections, insurance, and points that you can reinvest in the company.
If you see places where positive cash flow is waning, such as a decline in the middle or end of the month, it's time to start using specific resources to stretch payments, recoup what you're owed, or fund a few purchases. Consistency in this area will provide you with peace of mind and enable you to concentrate on other essential aspects of your company, such as creativity and development. Consistency is the secret to small business success in several respects.