Scaling a business is an exciting time. There's space for new opportunities and fresh ideas. But, as you expand, you may want to pay close attention to cash flow to ensure you're prepared to handle the ebb and flow that comes along with growth.
A lack of cash is one of the top reasons businesses fail. New projects, an increase in inventory, supporting larger clients and hiring staff are just a few areas that may impact your cash flow and slow your progress.
Here are five actions you can take now to make sure that you have cash when you need it.
1. Spend wisely.
Every dollar counts. Having a plan can help you map out your spending in a valuable way.
Decide what resources are critical right now and what can wait. Commit to what you need, when you need it, so you have money on hand down the line. For example, if you run a consulting agency, investing in people may be your most valuable resource; if you run an e-commerce business, you may find that branding and marketing are your most important areas in which to invest.
There can be a lot of overhead cost associated with growing a business. Having a steady cash flow takes planning. Decide what is essential, how you will cover costs initially and have a plan for expansion.
In my agency, we require a deposit for all new projects. The deposit is setup to cover our costs in case a client defaults on a payment.
2. Monitor your cash flow.
Keeping an eye on your cash flow can help you spot potential problems before they arise.
Knowing exactly what you are spending and when is important to ensure you have cash on hand when you need it. You will want to gather information from several sources including your financial department, credit and service representatives, and collections. Make sure to take into account loan interest and principal payments and seasonal fluctuations.
With today's tech, there are a wealth of resources available to help you streamline on your business and your cash flow. Consider looking for one that's right for you.
3. Hire slowly.
For most businesses, payroll is the biggest expense. That's why it can be beneficial to be strategic about the best time to bring on new employees. Outline what permanent staffing you need and create a timeline for hiring. Have a good idea of how much cash you'll need on hand to support new hires once they join the team.
Consider bringing on a contractor to do the work in the meantime. Contractors can give you the boost you may need until you have the cash to support an employee long term.
Evaluating your cash flow now and creating projections will help you determine when you'll be in a position to comfortably support the extra expenses that come with making additions to your staff.
4. Plan for the unexpected.
A contract falls through. A client is late on a payment. You're in a slow season. Consider the unexpected when you're evaluating your cash flow so you're prepared when unplanned things happen—because they always do.
One way to minimize the impact of unexpected circumstances on your cash flow is to have a contingency plan. Many businesses build a contingency into their budget. In my agency, we require a deposit for all new projects. The deposit is setup to cover our costs in case a client defaults on a payment. Additionally, to ensure we have money set aside for rainy days, we always save a portion of our profits.
Another helpful, standard practice is to space out payments in your contract, so that you are steadily receiving cash in the interim of completing a project.
It is also routine to check potential clients' references and credit reports before signing on. You can get a business information report from services such as Dun and Bradstreet to understand your clients' payment histories and decide if you feel comfortable taking them on and how best to prepare.
5. Setup a line of credit.
Taking on a new client or increasing your inventory can result in upfront expenses. To help support your cash flow, consider having a line of credit available that you can lean on to support these costs. In some cases, this option includes a business credit card or a business loan. The goal is to keep as much of your cash on-hand as possible to ensure it's available when you need it.
Businesses that take steps to monitor cash flow input and output closely may be in a better position to manage unexpected challenges. Spending slowly and planning well can help you weather the storm.
Read more articles on managing money.
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