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Cash flow issues have long plagued fledgling small business owners and have been identified as one of the key reasons businesses fail. And although a cash flow crisis might seem to suddenly appear, savvy entrepreneurs take steps to protect their small business cash flow early on in their business.

Learn about 20 different small business cash flow management options early on to best position your business for success. But first…

What Exactly is Small Business Cash Flow?

You’ll find many definitions of cash flow in dictionaries and from online sources. Some are pretty dry and best suited for academic discussions. Here’s one that explains cash flow in terms that might make better sense to business owners.

According to Entrepreneur.com, cash flow is simply “the difference between the available cash at the beginning of an accounting period and the cash remaining at the end of the period.” Cash flows into a business from a variety of sources, including sales or borrowed funds such as business loans or credit lines. It might also come from investment proceeds, or from selling equipment or other assets.

Cash flows out of a business to pay for operating and direct expenses, to make payments on borrowed money, and to buy equipment and assets for the business.

You know your cash flow needs work if you don’t have money left at the end of the accounting period. When you don’t have the money you need, you can’t pay your suppliers. If you can’t pay your suppliers, you don’t receive the materials needed to make your products. And if you don’t pay your service professionals, you don’t get the support and advice needed to keep your business running smoothly.

So how’s your cash flow? Assess your business’ cash flow by learning how to calculate basic financial ratios such as your accounts receivable turnover ratio, cash flow coverage ratio, cash flow margin ratio and current liability coverage ratio.

20 Ways to Smooth Your Cash Flow

Small business owners who want to work on becoming cash-flow positive have lots of options. Some methods are faster and quicker, but cost more in fees and interest. Others require more time and effort but cost less. Depending on your situation and type of business, here are 20 to choose from.

  1. Create a Small Business Cash Flow Forecast

A cash flow analysis helps you understand how money moves in and out of your business. And this helps you to make better decisions about invoicing and scheduling payments. 

Next, use your cash flow analysis to create a cash flow forecast or projection. This is an estimation of how you expect money to move through your business quarterly, semi-annually, or annually. 

A cash flow forecast also helps you make more informed decisions around hiring new staff, investing in growth opportunities, and applying for small business loans. Try using a free cash flow tool to get started.

  1. Set Small Business Cashflow Goals

Once you get a handle on your current and expected cash flow, set some weekly goals to improve. Wondering how to choose a cashflow goal? Some ideas include:

      • Shortening accounts receivables time frames (more on that below)
      • Extending time to pay suppliers (more on that below as well)
      • Start or grow emergency business savings
      • Lower interest paid on revolving credit to lower required payments
      • Minimize seasonal cash flow ebbs and flows (see point #20 below)

Don’t think your business cash flow goals get written in stone. Instead, they’ll continuously evolve to help improve the movement of money through your business.

  1. Plan Your Payments

Does your business pay rent, suppliers, utility bills, and payroll all on the same week – or even day? Doing so could lead to anxiety for you and financial problems (like NSF charges) if your sales can’t cover it.

The solution? Don’t set all your payments on the same day. Instead, look for opportunities to spread them out through the month. 

Start by listing all your payments. Next, split them into groups – critical payments (rent or mortgage, payroll), important payments (think utilities, taxes) and flexible payments (suppliers).

Stagger these three groups throughout the month, prioritizing group one. Spreading your payments out means you’ll (hopefully) have more money available to pay the bills scheduled for later in the month.

  1. Match Your Payroll Schedule to Your Sales Schedule

Matching your payroll schedule to your sales schedules can help smooth cash flow. However, this can be tricky depending on your business’ location. Some states have laws about how often you must pay employees. 

Take a look at your regular sales patterns and try to match your payroll to that schedule. This could mean changing weekly pay to bi-weekly or even bi-monthly (ie. the first and the 15th of each month).

And remember,  search the payroll laws before trying this method to smooth out your cash flow. 

  1. Trim Overhead Expenses

Your overhead expenses include all costs on your income statement with the exception of direct labor, direct materials, and direct expenses related to these. So things like accounting charges, legal charges, interest expenses, and taxes fall into the overhead expense category.

When you trim overhead expenses, you reduce your cash outflow and keep more money to pay your other bills and/or invest in your business. One way to lower overhead could include switching to a cloud-based accounting program. Or try replacing paid advertising with inbound marketing by creating useful content on your website. You might also want to consider bundling utilities or telecommunications services with one company to save money.

  1. Budget Small Business Taxes Monthly, File Them Quarterly

If you’ve been in business for any length of time, you’ll pay estimated taxes based on your previous year’s income. And although you’ll likely file your estimated taxes each quarter, consider including your small business taxes in your monthly budget. 

Set aside 1/12 of your estimated annual taxes each month. That way, you won’t scramble to find the cash to pay your taxes each quarter. 

  1. Use Money-Saving Technology to Improve Small Business Cash Flow

Is your business making good use of technology to save time and labor on accounting and financing activities? Today’s business apps and technology offer a variety of ways to help smooth the small business cash flow. 

For example, payroll services and cloud-based accounting and invoicing software could help reduce your bookkeeping and accounting fees. Portable card readers that attach to tablets or smartphones (such as a Square reader) also help save time on invoicing.

  1. Invoice Immediately

The longer you take to send out that invoice, the longer it takes to get paid. And when you invoice immediately, you avoid adding another item to your never ending “To-Do” list. The quicker your customers get their invoices, the sooner they can make payment arrangements.

  1. Shorten Your Accounts Receivables Time Frame 

Along with invoicing immediately, give your customers an incentive to pay early and shorten your accounts receivables time frame. Consider adding a  small discount to your pricing guide, such as 5% for payments made within 7 days of your invoice. Or offer a 3% discount for payments made within 30 days.

  1. Take Deposits/Retainers

Does your business work on long-term assignments for your clients? If so, consider requiring deposits or retainers as part of your bid and initial contract.

Retainers or deposits help businesses cover their expenses while working on longer-term projects. When you take on a long-term project for a client, you might not have the opportunity to take on shorter-term work for others that would pay quicker. However, you likely still have bills to pay during this time.

A retainer or deposit helps smooth your cash flow while you’re focused on lengthier projects.

  1. Take “Milestone” Payments for Larger Projects

Another option to help small businesses create a smoother cash flow involves what we like to call “milestone payments.” These payments help cover your monthly expenses for projects that span more than 60 days.

When you estimate the project length, consider including one or two milestone payments in the middle of your work. This depends on how many months you anticipate the work will take. For example, a 60-day project could include a milestone payment in the middle. So you might request a 25% retainer, 25% milestone payment due on day 31, and the remaining 50% of your fee due on completion.

  1. Even Out Your Small Business Seasonal Cash Flow

Landscaping companies, garden supplies, and snow removal services are just some of the small businesses that face seasonal cash flow challenges.

When your income depends on the weather and/or season, it’s even more important to take steps to smooth and strengthen your cash flow. After all, you’ll still have bills to pay even when your income slows down. Yet knowing you’ll have a slow period gives you the chance to take steps to prepare now.

Some options for seasonal businesses to improve cash flow include:

  • offering an installment payment plan at a discount. For example, offer 20% off for customers who pay for a landscaping package in full in December.
  • diversify your services and/or products by expanding to include non-seasonal yet related items, such as Christmas light installations or outdoor holiday decorating services
  • launch or expand your website to include passive income streams such as advertisements, affiliate income, or digital products
  1. Get an Operating Business Credit Line 

One popular method of taking care of cash flow issues involves using an operating business line of credit

An operating business credit line lets businesses borrow money as needed up to a pre-determined limit. It’s a flexible and convenient way to smooth over the rough patches all businesses experience when it comes to cash flow.

A couple of things to note. First, apply for an operating business credit line before you need it. Business owners who experience a cash flow crisis don’t need the added stress of trying to qualify for credit. Get it in place before you reach that point.

Next, it’s important to note that each lender might have slightly different lending rules, fees, and interest rates. And these could depend on your credit score. Also, with most credit lines users pay interest from the day they access the money.

  1. Get a Business Credit Card to Smooth Your Small Business Cash Flow

Making purchases with your business credit card means you don’t need to pay for the items or services immediately. Instead, you’ll pay them for them on (or before) the due date. This allows time for client payments to hit your bank account. 

And take note of the key difference between using a credit card and using your business line of credit for expenses. Interest on credit card purchases gets waived if you pay off your card balance in full by the due date. Business credit line interest starts accruing right from the purchase date, even if you make your payment by the due date.

  1. Pay Suppliers With a Credit Card (on the due date)

Does your supplier or utility company accept credit cards? If so, consider setting up your regular payments through your business credit card. Depending on the date of your purchase and your credit card’s billing cycle, this could extend your payment time for that supplier’s bill. 

 However, keep in mind that you could then face paying a large credit card bill each month.

  1. Take a Merchant Cash Advance

If your business faces a cash crunch, and you’ve exhausted other options, consider taking a merchant cash advance. This means selling a portion of your future credit card sales for a discount in order to receive a lump sum today.

Merchant cash advances work differently from regular business term loans. Instead of fixed monthly payments over a fixed term, repayment is made daily by withdrawing a percentage of your sales. Many merchant cash advances come with a higher cost than business credit lines, so keep this option in your back pocket to deal with cash flow issues.

  1. Offer Discounts for Regular Service Contracts 

Do you struggle with cash flow in your service business? If so, consider offering discounts for regular service contracts. At each and every service call, offer a 20% discount on an annual service contract if the customer signs up on the spot. 

Annual service contracts that come due throughout the year can provide you with ongoing monthly income. And they give you the opportunity to strengthen the relationships with your customers. Maintenance contracts, committing to seasonal tune-ups, and periodic audits are just some of the ways to create regular service contracts to smooth out your cash flow. 

  1. Offer a Fixed Rate, Periodic Payment Subscription Service

One way to creating additional, recurring monthly income is with subscriptions.

Look for opportunities in both product-based and service-based businesses for offering a subscription service. This could be based on services and products you already provide, or you could create a new one.

For example, offer a curated box of your popular or new items. Or if you’re in a service business, offer a monthly service audit or fix. Information-based businesses could create a monthly or even quarterly paid newsletter. The key is to offer a fixed rate, periodic payment subscription service that will bring in a regular income stream.

  1. Make it Easy for Customers to Pay You

Do you offer several different payment options for customers? When it’s easy to pay your bill, it’s easier for your customers to pay you quickly. 

In addition to accepting checks, get set up to accept credit card payments, and online payments. Give your clients a choice so they can choose the payment method they’re most comfortable using.

  1. Encourage Direct Debit Payments

Encourage your regular customers to set up a direct debit payment. This means the payment for your regular monthly invoice gets debited automatically from their chosen bank account. It’s another way to increase your regular monthly income and smooth out your small business cash flow.

Learn about the role of cash flow in your business to help you make better decisions around invoicing, borrowing money, pricing models, and investing. Consider your business cash flow as an indicator of your business’ health. Positive cash flow – when you have more money coming in than flowing out, means your business is healthy. And healthy businesses are the ones that grow.

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