While big business has more leeway when it comes to financial management, small businesses are largely dependent on managing their cash flow intelligently. This is easier said than done, however: More than one-quarter of U.S. small businesses classify cash flow management as their top challenge, per Simply Cashflow. In other nations, that number looks larger. More than half of Canadian small businesses report cash-flow management as their number-one problem. Because cash-flow management is crucial to small businesses success, entrepreneurs must get a handle on this early on in the business game.
Cash Flow Management 101
A cash flow chart helps you determine how much money is coming in, how much is coming out and whether your business is sustainable, according to SBA.gov. It is ground zero for gaining a handle on your cash flow. To create your cash flow chart, list out all one-time and recurring expenses, such as business cards, packaging for retail items or website hosting costs. Next, estimate your sales based on past sales or projections. Subtract your costs from your income to get your cash-flow chart. Although new businesses may show a net loss early on, the cash flow chart can help entrepreneurs plan for growth and future success.
SBA.gov also recommends that entrepreneurs cultivate a habit of setting aside money each week to invest in the business. If you’re working a day job, stash five percent of your earnings in your business account. If five percent is too much, start with a lower amount but be consistent about saving your money.
Common Small Business Challenges
For small businesses, billing clients can be challenging. Some clients may not want to pay on time, perhaps thinking they can hold out on paying you and pay their bigger bills first. This can affect your cash flow. You might offer an incentive for accounts paid in cash on delivery or give clients a discount if the invoice is paid within two weeks of receipt. If you cannot do that, you’ll need to call or email clients until they pay up. Inventory management is another common problem for small businesses. Ordering too little impacts potential sales, while ordering too much of a product that ends up doing poorly wastes money. SBA.gov recommends ordering the smallest amount reasonable based on your anticipated cash flow, and making sure that you can get a quick delivery if something sells faster than forecast. This way, you maintain as much cash in the pipeline without leaving your business unable to serve customers.
Preparing for Hard Times
While no one hopes for financial struggles, to remain in business over the long term, you will need to prepare to manage your cash flow in hard times. A business credit card that gives you cash back for office supplies and other business expenses can be a mainstay in difficult times. Keep track of finances and payroll with accounting software and online services such as Quickbooks. Financially planning and tracking is crucial to staying on track. SBA.gov notes that, in hard times, you will need to sell all business inventory and pay cash for goods and services if you cannot secure credit or a loan. In hard times, your cash flow chart can help you analyze finances and identify areas where you can cut expenses and restore financial health.