According to the Small Business Administration, almost 33% of businesses fail in their first two years of operation. While there are many different reasons that a business can fail to get off the ground, one of the most common is cash flow issues. Without adequate cash, businesses can’t pay employees, keep the utilities on, or pay rent.
So what can you do as you start out to protect your business from cash flow concerns?
Focus on managing your cash flow more than your profit
It’s good to know your breakeven point, the moment when you’ve gotten more out of your business than you’ve put into it, but in the early months, it’s more important to make sure that you’re keeping your cash flow in balance. If you’re specifically tracking your breakeven point, make sure that you’re separately tracking your cash flow – your business’s income and expenses each month.
Maintain your cash reserves
Hal Shelton, writing for SCORE, has suggested that many businesses need at least 3 to 6 months of cash expenses in reserve, ready for shortages, though he notes that different businesses may have different needs. It’s a good idea to open your doors with several months of cash ready in the bank; virtually no businesses are instantly generating as much cash as they need to function. You can also use a template from SCORE to get an idea of your cash needs over a 12 month period.
Minimize the amount of credit you give out
As much as possible, make sure that you’re offering net-receipt or net-15 terms; offer net-30 or net-60 only when absolutely necessary. When you’re working with other businesses, you may find that they have their own terms that you need to comply with in order to get their business. Your private or retail clients therefore may be necessary to keep your cash flowing.
Basically, you want to get paid as close to completing your work as possible.
When credit is offered, incentivize paying early
If you do need to offer net-30 or net-60 terms, give your clients a reason to pay early. Many companies offer a discount if the payment is made by a particular (earlier than due) date.
Use credit yourself when possible
When you can, get the best possible terms for your own payable, especially in the early years. If you can pay earlier (and get a discount!) great, but the more wiggle room you have, the easier it will be to pay when you have the cash available.
Pay attention, however; it’s easy to push bills off until tomorrow, and then find a large number available all at once.
Consider cloud based accounting software
With the number of free and inexpensive options for accounting software that’s based in the cloud, you should always be able to access your business’s account balances from your computer, laptop, or mobile device. Even if you’re just maintaining a spreadsheet on a cloud based platform, you need to be able to take a quick look and have an up to date awareness of whether or not you can make a purchase, extend credit, or take on a new client at the terms they can afford.
Keep cash flow expectations clear
If you have a bookkeeper or accountant who is managing the cash flow for your business, have a clear conversation with them about what your reserve tolerance is, and when you need to be notified. For example, let them know that you need to be alerted when your balances fall below $1000, or climb above $5000 (as two fairly random examples). This lets you worry about the other aspects of your business, while knowing that you’ll be notified when your cash needs your attention.
Project your cash flow
Your accountant should be able to help you prepare a cash flow projection. This will help you anticipate the months in which you will have shortfalls, and the months in which your business might be more profitable. This can help you save up for a “rainy day,” or know whether or not your business is ready for reinvestment.
While cash flow may be the most common reason for a business to fail, it isn’t a mystery why businesses have cash flow problems. By closely watching your cash, you can make sure that you stay afloat until you business is on solid ground.