It’s sad, but true: Half of all new businesses fail within the first five years. Although lots of factors contribute to business failure, a common culprit is poor cash management. All businesses must deal with the uncertainty of fluctuating sales, inventories and expenses, but managing these risks is especially important for small businesses with limited resources. So here are a few tips you can use to moderate the ebb and flow of cash in your business:
- Analyze cash flow. If you don’t know it’s broken, you can’t fix it. The starting point for any meaningful action to control cash is discovering where the money’s coming from and where it’s going. Get a handle on cash by monitoring your bank accounts for at least one complete business cycle; then use that information to establish a realistic forecast. This should be done throughout the year to help you understand your seasonal cash needs.
- Monitor receivables. Extending credit to risky customers, failing to identify late payers, refusing to collect payment on a timely basis — these practices amplify cash flow problems. Mitigate receivable fluctuations by generating aging reports, and then use those reports to follow up when payments are late. You may even want to offer discounts to customers that pay early.
- Slow down payments. Prudent cash flow management dictates that you retain cash as long as possible, so pay your vendors on time — not too early. Of course, if suppliers offer discounts for early payment, take advantage of cost savings whenever possible. Also consider negotiating with suppliers to extend payment terms.
- Time large expenses. If you know a property tax payment is due in May, start setting aside money in a separate fund in October. The same holds true for any large payment that comes due during the year. If your equipment is nearing the end of its useful life or your roof is showing signs of wear, start saving now. Don’t let big expenditures catch you by surprise.
By taking these steps and smoothing out cash fluctuations, you can help keep your company strong throughout the business cycle.
This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.