If you were to ask 100 small business owners what keeps them up at night, chances are you might get 50-75 different responses. However, if you asked the same 100 business owners, how much do you worry about cash flow in your company, almost all would say it’s one of their top concerns.
Cash flow is the lifeblood of every small business! If your company was a car, cash flow would be the fuel that keeps it running. The challenge for business owners is to not only keep the tank full but to have fuel in reserve in case they get caught running low in between gas stations. In other words, business owners need money in a reserve fund in the event “net 30” suddenly becomes “net 60” or worse.
What is the best way for a company to maintain proper cash flow? Here are three suggestions that I have found work very well for most small businesses.
Stay on Top of Your Receivables – It sounds easy enough…and why wouldn’t a business owner make sure they are getting paid on time? One of the biggest factors in driving small businesses into the ground is allowing clients to extend their payment terms, and then continuing to service their account. For example, you have a large client that represents 20-30% of your business. Typically, they pay net 30 days. However, there is a change in their billing system, and now they are switching everything to net 60 or even net 90 days. They tell you that, in order to keep their account, you must agree to the new terms. Before you say yes, what does that mean for your cash flow? Will you be able to get the same terms from your vendors? If not, you will quickly find a zero balance in your business checking account, and creditors knocking on your door.
Create an Emergency Fund – Whether it’s a line of credit from your bank, money that you’ve been able to save, or access to funds from a relative or an investor, you need to have 3-6 months of business expenses at your disposal to maintain proper cash flow. This assumes that your cash flow interruption is a hiccup and not something worse. If your business is in serious trouble, you should consult with an advisor or mentor to discuss other options.
Keep an Eye on Economic Indicators and Disasters – What moves your market or industry? More importantly, what could disrupt it? If you own a landscaping company, it’s imperative for you to follow the ups and downs of the local housing or commercial real estate market. If you have a construction business, seasonal storms can wreak havoc on your existing projects. Sometimes, it’s not your business that gets affected, but rather your customers’ businesses. That’s when you realize how important it is to stay on top of your receivables. The worst time to call a customer about an invoice is AFTER disaster strikes. Whether it’s a natural calamity or a man-made situation (e.g. bankruptcy), the likelihood of getting paid drops measurably after a misfortune occurs.
If you stay on top of your receivables, set up or maintain an emergency fund, and keep an eye on economic indicators and potential disasters, you will experience far fewer sleepless nights than the business owners who ignored the gauge on their fuel tank.