It's mid-year and you're a small business owner about to run payroll. You give your accountant the green light to release funds and then get an email back that reads, “Um, we don't have enough cash this month to cover salaries and expenses."
Panic and sleepless nights ensue.
If this scenario (or something like it) sounds familiar, the first thing to know is that you are not alone. Issues surrounding cash flow, at any time of year, aren't only reserved for early-stage startups and young entrepreneurs. On the contrary, longstanding corporations and business owners who've been around for decades also fall into cash flow traps from time to time.
Ken “Mr. Biz Solutions" Wentworth, a consulting CFO based in Columbus, Ohio, remembers a few years back sitting down for dinner on a Friday night when his business phone rang.
“The person didn't say their name, they only said, 'I don't think I can make payroll in eight days,'" Wentworth remembers. “What I heard was pure panic."
Within a few minutes, Wentworth learned he was talking to the owner of a restaurant chain—a business that, from the outside, looked successful, but had been overextended.
Another time, a business owner of nearly 20 years called him up worried about cash flow. The issue: his client hadn't adjusted the company's margins in years and pricing was all over the map.
“When you are a small business, say $2 million per year, problems don't seem as big and can get hidden," he says. “But when you grow to a $5 million, $8 million business, those small problems from a while ago are multiplied into glaring issues that can really sneak up on you."
Wentworth says it is usually later in the year when he gets his most panicked cash-flow-related calls, but if a business owner can look at their cash in the summer months, it will put them in a better spot in the long run.
Here are five ways to get a handle on your cash flow right now:
1. Identify the late payers.
Business owners can get confused when landing a slew of sales without seeing the cash immediately pour in. This is an accounts receivable issue. And when the timing of accounts receivable doesn't match accounts payable (money you owe a vendor), and you end up short on cash, it can spell problems for everyone involved.
“Figure out who owes you money and start dialing for dollars," Wentworth recommends. “If someone owes you $10,000 and can only give you $5,000, take it."
One way to get ahead of late payments is to have an ironclad contract with your customers that enforces fees for tardiness and rewards early or on-time payments.
“Consider providing early payment discounts—maybe 5 or 10 percent—it can really incentivize customers to pay on time," suggests Priyanka Prakash, a New York City-based business finance expert with Fundera, a company that offers small-business loans. “And send your invoices right away. Waiting even a day can hurt your cash flow."
2. Pay on time.
Apply the golden rule to your vendors, and watch it pay off. When negotiating (or re-negotiating) a contract, ask for early and prompt payment discounts, Prakash says. When you receive those discounts, stash the cash to help you cover expenses. If anything, paying on time will help you in the karma department.
3. Look hard at your expenses.
Jared Weitz's heart dropped a few years ago when he found out one of his biggest customers was going out of business and couldn't make good on its last invoice. The damage was in the thousands of dollars—he was eventually paid about 45 percent of what he was owed—and the experience helped him look at his business from an entirely different perspective.
“We had to come up with the 55 percent difference—it took us a while but now we run more efficiently than we ever have because of a few tweaks," says Weitz, founder and CEO of business loan provider United Capital Source Inc.
When you grow to a $5 million, $8 million business, those small problems from a while ago are multiplied into glaring issues that can really sneak up on you.
—Ken Wentworth, founder, Mr. Biz Solutions
The main tweak: looking at expenses. He changed benefits providers and moved office locations from New York City to the city of Great Neck, New York—about 20 miles east.
“We looked at our heaviest expenses and saw where we could trim," he says. “Rent was a big one, and since our move we are able to pay our employees more and are still seeing six-figure savings."
4. Clear out unused inventory.
If you have inventory sitting in the back of your location—even old, used inventory—you have an opportunity to make some cash, says Wentworth.
“Put on a clearance sale," he suggests. “If you sell sweatshirts for $20 apiece, tell people they are $5 now and watch the cash come in."
5. Save for a rainy day and pay quarterly taxes.
Weitz is careful about living off a fixed dollar amount, even when his company is going gangbusters. He keeps his extra cash in a high-interest account and finds that it helps with taxes—which he pays quarterly.
“Try paying quarterly so you aren't as shocked at the end of the year," he says. “It is important to estimate what is coming in and out so you aren't surprised."
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