Keeping Your Small Business Cash Flow Balanced

23 Feb, 2016 / Comments: Comments Off on Keeping Your Small Business Cash Flow Balanced / By

The problem is that the difference between money owed and money received for small businesses is often overlooked, which can lead to significant cash flow issues. Just as problematic is small business owners who are overly eager to pay off their invoices when they come in. If you are not willing to be in control of your cash flow, then you put your small business at risk for not having enough cash reserves to survive difficult financial times. However, the good news is that by learning to balance your cash flow, you can work to keep your business thriving and healthy. Let’s take a look at a few ways to keep your cash flow healthy and balanced.

 

Anticipate the Needs of the Future

As a small business owner, there is nothing trickier than having to search for cash when you are desperate. It is imperative to keep timely, accurate accounting records to accurately know the financial standing of your small business. Utilize your past cash flow and monthly income statements, as well as your balance sheet so that you can calculate how much cash you have available and predict what you will have for the next several months. Creating pro forma statements will aid you in staying alert in the case that you come up with any shortfalls, and gives you time to prepare properly.

 

Keep Your Cash Working for You

Maintain your cash balances in an interest-accruing account, available to the majority of big banks. It is usually recommended that you use a money market account or certificate of deposit (CDs) as these are higher paying accounts. However, in some instances, you may have to input a minimum balance requirement. That being said it is best that you avoid using long-term CDs, as these will lock you in for an extended period, since withdrawing money from them early will cause you to lose interest.

 

Ask for as Long of a Term as Possible

Don’t hesitate to ask for the terms you want from suppliers, as there is no other way to get what you need from them. When you are negotiating with them, it is recommended that you ask for the longest payment terms that you can. Having longer payment terms gives you a buffer between your payables and your receivables, and more time between when your payments are due. This gives you a better chance of having enough cash on hand to fulfill your small business’s needs.

 

Maximize Cash Inflows

There are many ways to increase you cash flow, especially if you engage in long contracts or sell custom products. For instance, you can require a 50 percent security deposit of an order if the service or product is extraordinarily complex, large, or one of a kind. Additionally, if you use contracts then make sure that you set up a schedule payment system, as well as amounts that exceed or parallel your sunk costs. If a customer wants something changed from your standard service or product that is not within your contract, then it is recommended that you seek higher payment through change orders or fees.

 

Take Out a Loan When Needed

Being able to entice investors or borrow a loan from a bank to give your business an influx of cash when your funds are low is tough. However, that does not mean it is impossible to obtain a loan through other ways, such as a small business loan lender. Lending from a bank tends to be extremely difficult for a company that is in desperate need of cash, however, alternative lenders usually are much more lenient.

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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