In the past 30 plus years I’ve spoken to many business owners who have encountered cash flow issues over the course of running their businesses. The proper management of your cash flow can help you prepare for seasonal business lulls, plan for future financing, and provide you with an overall sense of confidence and control over a challenging aspect of your business.
Here are some of the best practices that I’ve found to be helpful in managing your cash flow.
What are some cash flow issues that can occur?
Most business owners who pay close attention to how much cash flow is at their disposal within a certain period (within a month, for example) have a stronger basis for maintaining positive cash flow throughout the year.
However, even if you are monitoring your cash flow closely, you may find that you’re still encountering issues. I see this occur most frequently with business owners whose industries are busier during certain seasons, such as construction, auto repair and maintenance, and catering. Service industries where demand is higher during certain times of the year may have difficulties averaging their yearly cash flow during the slower seasons.
How can you improve cash flow?
- Improving your cash flow is a process that may require an adjustment in your billing process. Taking steps to analyze your profitability, including the quality and pricing of your products or services, will help you tighten loose ends. This is especially true if you’ll be seeking financing in the future, as having an inventory of your assets could be crucial in times when cash flow is limited.
- When looking for ways to speed up cash inflow, I’ve found it particularly helpful for business owners to introduce progress billing. Progress billing allows you to bill your clients incrementally as opposed to in one large sum. This practice ensures that you have money consistently coming in while you are working on your clients’ project, eliminating the waiting period for payment after the project is completed.
- If you need to raise cash in a hurry, you can also consider changing the terms of payment, and offering incentives for alternative methods of immediate payment; direct deposit for example.
- Selling off inventory, or leasing equipment instead of buying it is a viable option to help you maintain a healthy cash flow.
- Think ahead when you’re planning any large purchases. A cash flow projection will help you plan your financing needs ahead of time.
- Good cash flow management goes hand-and-hand with good business management. Take stock of your products and services to make sure your prices allow you to make the margins you need to be profitable.
Cash flow management can absolutely debilitate a company, leading to layoffs and poor profitability. However, by staying on top of your cash flow at all times, you can avoid future issues and maintain a profit throughout the calendar year.
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