Understanding & Preserving Your Cash Flow

Starting a business is not for the faint of heart. To survive and flourish requires a great idea, dedication, hard work, strategic planning, and a little luck. But even a great business can fail simply because it runs out of money before it is able to get off the ground or because it grows too fast and is not able to keep up with the corresponding increase in expenses. Managing and preserving cash is critical to survival, especially in the first few years of the business.  
It is often said, Cash is King, so here are some simple things business owners can do to treat their cash like royalty. 

Cash Flow Forecasting:

You can’t manage what you can’t see. Produce a realistic, detailed cash flow forecast for at least 12 months and update it monthly, or even better, weekly. Identify potential cash flow crunches and plan accordingly. There are plenty of templates available online.  

Slow Your Cash Outlay:

a) Pay bills only when due. Small businesses often pay bills on a weekly or monthly basis to suit administration. However, delaying even a few days can improve cash flow. Make payments on the last day possible without paying late. You want to avoid penalties and maintain good relations with your creditors and suppliers.  
b) When cash is tight or negative, prioritize payments. Payroll is #1. Taxes are #2. Then comes equipment leases, bank loans, mortgages and other items that have been financed. Late payments to finance companies are reported to credit bureaus and can damage your credit rating, making it harder to secure financing in the future. Next, pay suppliers who you will need services from in the future. Finally, pay all other suppliers as quickly as possible as cash flow allows. When things are tight, talk to your creditors and try to negotiate extended terms or make partial payments.  
c) Trim Inventory and have inventory control systems in place. Consider the 80/20 rule regarding product lines. Know which products generate the majority of your sales and profits. Reduce or eliminate the bottom 20%.  
d) Negotiate costs and payment terms with suppliers. Request payment terms of at least 30 days and take advantage of early payment discounts when cash flow allows.  
e) Pay by credit card to give yourself an extra 30 days, but only if you can pay off the full balance when due. Carrying credit card debt will only put more stain on your cash flow.  

Speed Up Cash Inputs:

a) Focus on increasing sales, especially to customers who pay cash or pay quickly. Request pre-payment, deposits or progress payments where it makes sense.  
b) Set credit limits with customers. Run credit reports on your customers and update them at least every 6 months. Don’t be afraid to deny or limit credit to overdue accounts.  
c) Lay out payment terms clearly with your customers beforehand and on your invoices. Offer discounts for early payment and penalties for late payment.  
d) Send out invoices promptly and invoice accurately. Don’t wait until the end of the week or month to invoice. Make sure invoicing is accurate. Errors on invoices provide a convenient excuse for customers to delay payment. Always include the due date on invoices.  
e) Chase overdue accounts. Call the day after payment is due. Don’t be afraid to ask for payment. You are showing your customers that you are organized and on top of your business.  
f) Sell your invoices. One of the most dramatic ways to improve cash flow is to sell, or factor, your invoices to a factoring company. You get your cash right away while the factor takes over the waiting period. The cost can often be off-set by securing discounts from suppliers for your early payments.  
g) Change your payment terms. Test the effect on new customers by reducing your payment terms from say 30 days to 15 days. You may be surprised by the lack of reaction. Reducing your days sales outstanding (DSO) by just a few days can have a dramatic impact on your cash flow.  
Staying on top of your cash flow is critical to the success of your business. You face a number of challenges as a business owner. Take the steps necessary to make sure your cash outlay aligns with your cash input so that you can focus on growing your business.  
Anne MacRae has been in the factoring, trade financing and asset based lending industry since 2006. She is the Vice President of Business Development with Express Business Funding, a leading Canadian factoring and ABL company, and sits is on the Board of Directors of the International Factoring Association for Canada. Prior to EBF, Anne owned her own business and knows first-hand the challenges entrepreneurs face in obtaining financing. She uses this experience to help hundreds of clients secure funding to grow their businesses.