Smoothing out cash flow could save your business
A sad and oft-repeated truth is that half of all new businesses fail within the first five years. In fact, all too many fail in their first decade.
Although many factors contribute to business failure, a common culprit is poor cash management. Farmers, retailers, and car dealers are especially aware of seasonal fluctuations in cash flows. But to some extent, all businesses, large and small, must deal with the uncertainty of fluctuating sales, inventories, and expenses. An owner-manager who engages in wishful thinking about profitability, who becomes lackadaisical about money flowing through the business, is often headed for disaster. By endeavoring to smooth out cash fluctuations, prudent managers keep their companies strong throughout the business cycle.
Follow these practices to moderate the ebb and flow of cash in your business.
- Analyze cash every month. Analyzing cash doesn't have to be a complicated procedure. You simply prepare a schedule that shows the cash balance at the beginning of the month, then add cash you received (from sales, collections on receivables, asset dispositions, and so forth), subtract cash you spent, and calculate the ending cash balance. If your cash balance is decreasing month by month, you have a negative cash flow. If it's climbing, your cash flow is positive.
- Monitor receivables. Many businesses fall short in this area. Extending credit to deadbeats, failing to identify late payers, failing to collect on a timely basis - these practices amplify cash flow problems. Mitigate receivable fluctuations by using financial software to generate aging reports, following up when payments are even a day late and offering discounts to customers who pay early. Factoring receivables - selling your invoices to a factoring company - is another way to maintain a predictable cash flow.
- Slow down disbursements. Prudent cash flow management dictates that you retain cash as long as possible. Pay your vendors on time - not too early, not too late. Of course, if suppliers offer discounts for early payment, take advantage of cost savings whenever possible. Consider also negotiating with suppliers to extend payment times.
- Time large expenses. If you know a property tax payment is due in June, start setting aside money in a separate fund in January. 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.