Poor cash flow is the #1 killer of small businesses. What are the steps your organization can take to ensure proper cash flow and keep your business operating even when revenues are constricted? Article #10 in a series exploring the big questions that entrepreneurs ask as they’re starting up and growing their businesses.
Poor cash flow is the #1 business killer
It’s a simple fact: according to Dun & Bradstreet, “90% of small business failures are caused by poor cash flow.” Cash flow is an important enough topic that we’ve already written about it numerous times. And we’ve already outlined some basic steps you can take to ensure you can make payroll every cycle. But it’s such a critical topic that it’s worth a question of its own: how can we ensure proper cash flow and keep your business operating even when revenues are constricted?
We’ve scoured the web and queried the experts to develop our own list of cash flow savers. Here are ten tips for improving cash flow that you can implement right now:
- Send invoices right away! I can’t say this loudly enough. DSO — “days sales outstanding” — is an important metric that can keep your business going and identify potential problem situations before they come to a head.
- Invoice online and support multiple payment modes. The more options you give your customers for paying, the quicker you’ll get your payments.
- Offer discounts for early payment. Don’t just penalize buyers for late payments. Encourage them to pay early!
- Outsource your payroll. Use an electronic payroll service, encourage direct deposit, and “transfer payroll funds immediately before payment to keep your cash earning interest as long as possible.”
- Lease, don’t buy. Depending in its depreciation schedule, leasing your equipment can make a lot more sense than buying it, especially when it comes to cash flow.
- Repair, don’t replace. “Fix expensive capital equipment instead of replacing it. Money spent on maintenance will save you money on early replacement costs.”
- Spread out your expenses. If you can adjust the payment dates for regularly occurring expenses, take advantage of the option so all of your bills don’t come due on the first of the month.
- Manage your inventory better. High inventory numbers can severely impact your costs and ability to manage cash outflow effectively. If you deal in physical goods, invest in inventory management software to keep your numbers in the right range.
- Look ahead 3-6 months. “Use your past monthly income and cash flow statements as well as your balance sheet to calculate available cash and project likely results for the next three to six months. These pro forma statements can help alert you in advance of any shortfalls, giving you time to prepare for them.”
- Save up for your rainy day fund. The first time your P&L is in the black is not the time to spend — it’s the time to squirrel away some funds to provide a buffer for tough times.
How robust is your rainy day fund? Let us know in the comments below.