Stressing over cash flow tends to be part of the job for many small business owners. Without money on hand, you can't make payroll, cover your bills, or pay your taxes.
Improving cash flow can be a challenge, but doing it will help put your business on much stronger footing in the long term. Read on for five hidden cash flow leaks you should look out for, in order to give your business valuable financial breathing room.
Leak 1: Slow Collection on Invoices
After you make a big sale, it can feel like the job is done. But you shouldn't celebrate just yet. You also need to make sure your clients deliver payment in a timely fashion. If your accounts receivables start to build because clients take too long to pay, that can easily put you in a cash flow shortage, even if your business is highly profitable on paper.
To help speed up payment, start by negotiating terms with your clients to make the payment deadline as early as you can. You could also ask for a partial deposit upfront to immediately generate some cash. As soon as a client is late on a payment, reach out to remind them. We've put together a guide on how to encourage your customers to settle their accounts on time. If you’re having trouble keeping track, consider using invoice management software to automate the process for you.
Leak 2: Covering Accounts Payable Too Quickly
As you speed up processing accounts receivable, consider the opposite strategy for your accounts payable. Instead of sending out a check as soon as a bill comes in, read through the terms to see how long you can wait on payment. Just waiting until these deadlines can prevent a cash shortage.
Don’t be afraid to negotiate, either. Contact vendors and see whether they’d give you extra payment time in exchange for your business. Finally, when you can afford to spend more, see whether you could qualify for a discount for paying early. This way you boost your profit margins when cash is plentiful while buying more time when it isn’t.
Leak 3: Too Many Unnecessary Expenses
Business expenses can sneak up on you: extra office space you don’t use, an unsold inventory buildup, costly employee phone plans, to name a few. Each individual purchase might be a small amount, but combined they can turn into a serious drain on your cash flow.
By dedicating time to business expense management and cutting out unnecessary spending, you can help plug cash leaks at their source. You can also think of your expenses with a year-round approach, and reduce certain costly expenses in times of the year they are not required to keep the business running.
Leak 4: Not Studying Cash Flow Patterns
Cash flow tends to fluctuate throughout the year. Some months, you have more money than you need but during others, it gets tight. If you don’t expect an upcoming cash jam, it can leave you scrambling.
These swings don’t have to catch you off-guard because chances are there’s a pattern. If you perform a cash flow analysis, where you study your business history to identify trends, you can spot cash flow swings ahead of time and start preparing earlier.
Leak 5: Failing to Have a Backup Plan
While performing a cash flow analysis can help you figure out how to plan ahead, the world of business is still unpredictable. It’s possible that despite your best efforts, you can still run into a cash flow shortage. Knowing that this can happen, consider setting up a backup plan for financial emergencies ahead of time.
One potential backup plan can be to apply for a Charge Card. They are a great option for businesses looking to remain interest and credit free, while giving you more wiggle room on your balance sheet. With an American Express® Business Card, you get up to 54 days until payment is due, so there's more time between paying suppliers and outstanding accounts – and your cash flow is maximised.
- The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.