Cindy is a client of Halton’s Small Business Centre. She owns a small business that is currently struggling. She has clients, but she has a hard time serving those clients because she doesn’t have enough cash or credit to buy the supplies and inventory she needs. Even when she gets orders she can’t fill them because she is too shy to ask for a deposit or a down payment from those placing the orders. Due to her limited cash flow she can’t afford staff, she’s stretching herself to pay the bills, and she’s working around the clock to maintain a business that is stressing her out. And that trade show down in Florida that she was dying to attend this year? Forget about it; being cash poor means that Cindy has very few options. Sound familiar?
Small business owners often find themselves in difficult situations because they don’t have enough available cash. Cash is more than just a nice thing to have; cash means options, opportunities, and possibilities for the small business owner. It also provides a feeling of stability, something that entrepreneurs rarely feel in a struggling business.
So if cash is king, how can Cindy and other small business owners increase cash flow? Here are five ways to do so:
1. Follow the three-month rule: When launching your business, try to start out with a minimum of three months’ worth of operating costs in cash on hand. This means that if your average monthly costs to run the business are two thousand dollars, wait until you have six thousand dollars in cash before you get started, and then always try to keep six thousand dollars in cash minimum in the business. Why? Well, your bills will be due every month, no exceptions. While paying these bills you might have a slow sales month, some clients might be slow to pay, or you might have other unexpected costs. Be prepared with extra cash and you will be able to weather the storms.
2. Get deposits from clients: When making a sale, make sure to get a deposit from your client (if your type of business warrants it). It guarantees the sale and improves your cash flow.
3. Stay on top of receivables: Have a system in place to keep you on track with your accounts receivable. Your receivables are those accounts that owe you money. Don’t be shy in following up with your clients if they have an outstanding balance. Your follow-up could mean the difference between having positive cash flow and a very difficult month.
4. Make good decisions: When you are having a good month in the business, hold on to some of your excess cash and plan for a rainy day. While it’s fun to go big screen TV shopping, it’s even more fun to have a thriving business for years to come.
Buying on credit when you have no way to pay for it is a guarantee for disaster. Be disciplined when it comes to buying equipment, planning travel, hiring staff, and growing your business. Good decisions with an eye on the big picture will help you to achieve your goal of having a positive cash flow.
5. Avoid undercharging: One of the most common mistakes new business owners make is that they don’t charge enough. If you aren’t charging enough, you might find yourself in a situation where you are making sales but still struggling. Take an honest look at your business, at the value you provide, and what your competitors are charging. Increasing your fees might be a simple way to improve an ailing cash flow.
Visit the Halton Small Business Centre at www.halton.ca/business.
What were your experiences with cash and credit when launching your small business? Leave us a comment!