No matter how successful a company is, accessible short-term working capital is essential. Paying salaries, buying supplies and inventory, and managing the day-to-day operations require access to cash, not accounts receivables. As a business owner, you have to proactively look for cash flow bottlenecks and shortages, or risk finding yourself (or your accountant) scrounging in the couch cushions for spare change to pay the bills.
Don’t forget to save.
As you set up your small business, keep some cash available in reserve. Initial financing, office expenses, and hiring employees can be expensive. Although many new business owners consider these expenses and try to keep costs low, they often sink too much money into assets and keep very little in the way of reserves.
Don’t count on money you don’t already have – keep cash on hand from day one to prevent penny-pinching later on. Even if it means starting out small, reserving some cash will give you a better sense of the capital you have to work with and you’ll be better prepared for any unexpected costs.
Know your customers.
If your company relies on few large purchases – like car dealerships or appliance retailers often do – run credit checks on potential buyers. Customers with poor credit will likely take longer to pay you back, leaving your cash flow in limbo until someone is able to pay. Pre-qualify clients for special payment options to help offset gaps in your income.
Additionally, you can encourage timely repayments by offering discounts to customers willing to pay in cash. A 2% break on list price can make all the difference to a customer and can help you clear more invoices in a shorter period of time.
Track your expenses.
Knowing where your cash is going is a crucial way to avoid cash flow gaps. Keeping detailed logs of accounts payable and receivable can help you identify which bills need to be paid right away and which expenses can be reduced. Take an extra look at areas where expenses are unreasonably high, and take proactive steps to reduce those costs.
In addition, know the average rate of receivables paid monthly, to better predict your future cash flow. Making these kinds of changes to your cash situation takes a hands-on approach, so be prepared to make adjustments if needed.
Working capital, rather than receivables, should be your top priority in order to keep your business out of the red in the long run. Take the time to carefully analyze your receivables and payables: who your customers are, how much income you’re generating, and where your expenses are. By starting out with a reserve, controlling your customers, promoting cash use, and tracking expenses, you can take charge of your cash flow.