How to manage cash flow constraints

Run Your Business Feb 15, 2017

Learn how to keep cash flowing to decrease the gaps between spending and getting paid.

The best way to manage cash flow constraints is to prevent them in the first place. It’s important to avoid spending all your cash on potentially slow moving inventory, just as it’s good to avoid having too many unpaid invoices. You may even have to say “no” to hard-to-resist opportunities, like a new contract that will incur a lot of upfront costs. For an ambitious, small business with growth goals, these can be challenging decisions to make. 

Spend less

Perhaps the most obvious way to preserve cash is to spend less of it.

  • Reduce costs. If you manufacture goods, look for ways to reduce per-unit production costs. If you have a service business, look for effective ways of acquiring new customers while minimizing what you spend on sales and marketing.

  • Lease instead of buy. If equipment or fleet expenses stretch your cash flow, consider leasing instead. You may pay slightly more over the long term, but you’ll keep more cash on hand and experience other benefits of leasing.

Keep cash flowing

Before your expenses get ahead of your income, invest in consistent invoicing and collection processes so there is less of a gap between when you spend money and when you get paid for goods or services.

  • Make projections. Floating inventory or payroll for a month or two sounds doable, but you’re in business for the long haul. Project how your cash flow will affect your business after 12 or 18 months to get a better idea of the steps you should take today.

  • Offer incentives for early payment. Charging late fees for unpaid invoices is a common practice, but it still leaves you cash strapped until payment arrives. Try offering a discount to customers who pay early instead.

  • Invoice more frequently. If you invoice once a month, you may have already lost valuable collection days. The sooner you invoice, the sooner you’ll get paid.

  • Consider accepting credit cards. Consumers and corporations use credit cards to pay bills large and small. Incurring a small processing fee may pay off if you are getting paid faster. 

Access additional funding

Prevent a cash emergency by seeking additional funding sources before you need them. If you reach a point of desperation, it signals to lenders and investors that your business has bigger financial problems than a temporary cash crunch.

  • Apply for a small business loan. The best time to apply for a small business loan is when you don’t need a small business loan. When business is good and cash flow is positive, you will potentially qualify for lower interest rates and launch a positive relationship with your bank.

  • Apply for a line of credit. Borrow money, repay it and borrow it again when you need it. A line of credit can help you meet payroll, purchase supplies and fund day-to-day operations while giving you more flexible payment terms compared to a traditional small business loan.

  • Court investors. Bootstrapping a business is noble, but if you have a solid business plan, investors may provide cash, or even loans, that can help you prevent cash flow challenges. As a bonus, most investors share knowledge, experience and relationships that can help you achieve smart, sustainable growth. 

Even with these cash flow measures in place, it’s still beneficial to set calculated small business growth goals and target good-fit customers for your stage and capabilities. Saying “no” in the short term is hard, but it may be necessary if you want to say “yes” to consistent cash flow and long-term profits.

Sources: 

http://www.businessknowhow.com/money/cashflow.htm

https://www.americanexpress.com/us/small-business/openforum/articles/7-no-brainers-for-improving-small-business-cash-flow/

https://www.joinharper.com/essential-cash-flow-rules-for-startups/

http://smallbusiness.chron.com/cash-flow-problems-business-4916.html

https://www.newyorkfed.org/research/staff_reports/sr108.html

http://www.more-for-small-business.com/profit-maximization.html

https://www.sba.gov/blogs/5-reasons-business-revolving-line-credit-may-benefit-you

https://www.nerdwallet.com/blog/small-business/cash-flow-loans/

https://www.entrepreneur.com/article/187366

Kelly Burkart is a freelance writer from Minneapolis, Minn. While she has spent most of her time writing about financial services the past 15 years, she has also explored and written about everything from cardiovascular health to travel, higher education and sustainable energy practices.

KELLY BURKART
Article by KELLY BURKART, Content Strategist/writer