Is your business ready for its next big opportunity? If so, don’t forget there’s one thing that can trump experience, know-how and sheer enthusiasm: cash flow. Often, the cash to hire, buy necessary equipment and cover other startup expenses can make all the difference between a great opportunity and a missed one.
To help ensure your business is ready, here are some tips based on the input of other business owners that can help you keep a steady supply of cash on hand.
Know where you stand. When it comes to cash flow, knowledge is power. Cash flow crunches don’t appear out of nowhere, and they can often be spotted—and avoided—by knowing exactly where you stand with a cash flow statement. Income statements show sales, expenses and profits at a given moment, but cash flow statements show the movement of money in and out of your business over a specific period of time. This will help you see whether you’re building or draining working capital.
Streamline expenses. Short of billing more, one obvious way to balance receivables with payables is to simply cut down on expenses. Target recurring costs because even a small reduction can add up to significant savings over time. Find creative ways, for example, to handle peaks in demand without hiring additional staff, by relying on outsourcing or temporary help. Consider reassessing monthly services, such as the company’s cell phone plan, to cut back on unneeded services and costs. When you have sufficient cash, take advantage of vendors’ payment terms that reward early payment with a 1 to 2 percent discount. Small discounts such as these can add up, and that’s money you can reinvest in your business. If early-payment discounts aren’t available to you, another possibility is to rely on credit or charge cards that offer them.
Actively manage accounts payable. When cash is tight, delay payments as much as possible without paying late. Using charge cards to cover purchases is one option, but you can also consider bartering for goods or services or using points and miles from credit card rewards programs.
Stay on top of receivables. There may be times when you feel receivables are beyond your control, but there are steps you can take to speed payments. First, state clear payment terms and stick to them. You may also encourage some customers with early-pay discounts of your own. Be aware, however, that some customers may feel in their right to take the discount without paying early, so be selective. Another tactic is to ask for a partial payment upfront—or for a larger initial payment.
Offer a variety of payment options. If you’re not willing to take the risk of offering an early-payment discount, encourage the use of charge and credit cards. Unlike with checks, you won’t run the risk of a customer’s overdrawn account or have to wait for a check to arrive in the mail.
Outsource receivables. Bad credit can be contagious, so it’s important to prevent bad customers from affecting your good credit. Protect yourself from late-payers or non-payers by putting a reputable intermediary in the middle. Hire or assign a reliable bookkeeper or accountant on a contract basis to handle accounts receivable functions. His or her job will be to approve credit, make collection calls, receive payments and make deposits.
Create a Plan B. Even the most diligent cash managers need to find cash for unplanned expenses or for investments, such as new machinery or tools. In these cases, it’s important to have several sources of financing lined up. Planning ahead will allow you to find the best options and could mean being more likely to receive financing before you’re cash-strapped. When conducting research, don’t overlook special lending programs you may qualify for, such as those designated for small businesses owned by women or minorities.
No matter how well you plan, managing the unexpected is never easy. In these situations, the best you can hope for is mitigating risk by having working capital. For small-business owners working capital will allow you to be flexible—taking on new opportunities and conquering crises while covering any expenses that come your way.
Federico Acuna, vice president, American Express OPEN, oversees the Enhanced Plum Card, a charge card that helps small business owners better manage cash flow and free up working capital by taking advantage of the card’s built-in trader terms.
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