5 Essential Cash Flow Management Tips Every Small Business Owner Needs to Know
If you want the best chance at success as a small business owner, then taking good care of your finances is imperative. This doesn't just mean profit - you need to prioritise keeping cash in the bank. Growing your small business is difficult when you're continually running out of funds. This article will share five tips to help you manage your cash flow to continue operating smoothly and plot a roadmap for steady growth.
Calculate Days Cash on Hand
Most business owners closely monitor their bank balance via online banking or their bank's app and quickly decide what they can and can't afford. However, the reality is that there are always expenses coming up, like it or not. Therefore, you need to know how long you have before cash runs out to make informed decisions about which purchases are necessary and which can wait.
Days cash on hand refers to the number of days your money will last if you make no new sales. The more days cash on hand you have, the greater your financial cushion. Fifteen days or more gives you a small buffer, but you should aim to have at least 45 days of cash on hand. But the actual amount you will need will depend on the structure of your business.
Keep an Eye on Payment Terms
When you have a contract with a large company with net 60 or 120 payment terms, you won't be compensated for several months after work is completed. This can seriously threaten your cash flow, so consider renegotiating payment terms with your existing customers to improve your situation. Also, from now on, make it a priority to negotiate payment terms up front when signing new clients.
On top of this, you should keep an eye on how long it takes each customer to pay and collect data on the average number of days to collect. It would help if you aimed to reduce this figure as much as possible by sending reminders and introducing early payment incentives or late fees.
Understand Customer Concentration
Customer concentration is the proportion of your revenue that relies on a small number of customers. This figure is a good indicator of how stable your business is and can thus inform your next financial move.
You have invested lots of time and money into your business, so don't let one or two customers control the fate of your company. If one customer is late to pay you, the consequences could devastate your business. It's essential to keep a close eye on your customer concentration and ensure that the right amount of customers support you.
Slow Your Outflow
Naturally, your vendors want payment as soon as possible. If you're a diligent and financially conscious business owner, paying them as quickly as possible is a great idea, but it may be worth delaying a little. Of course, it's crucial to meet the terms of the sale and pay on time, but if you have 30 days to pay, consider paying on day 28 rather than day 2. This gives you a chance to get more money in the bank before paying out and helps to create a bigger financial buffer.
Build Relationships with Lenders
It's far easier to borrow when the going is good. However, trying to secure a loan when your back is against the wall is no mean feat and will usually result in high rates of interest. It's a good idea to organise a line of credit and business credit card when the going is good, as you will only pay interest once you need the money. Making connections with lenders early on in your business, rather than waiting until you need help, is an excellent way to protect yourself against future cash flow issues. After all, he who has the gold makes the rules.
Healthy cash flow and ample reserve are the backbone of any business. It provides stability and security, as well as maximum opportunity for growth. But, even more importantly, good cash flow management ensures peace of mind so you don't have those late-night worries about being unable to pay your employees tomorrow morning.