How to Spot Cash Flow Issues and Fix Them
Please Note: This article does include links that I may or may not profit from.
Does your business show a profit on paper but still doesn’t have enough cash?
Many new business owners find themselves in this completely confusing situation. And it can cause a lot of problems for your company – even put you out of business – if you don’t know the best ways to address it.
The thing is: Profits (making money) and cash (having money) aren’t the same. And your business can easily be swimming in one and starving for the other. Even a highly profitable business can be short on cash… because profits don’t always turn into money.
And for small business owners, having enough cash can mean the difference between success and failure – even more than profits can. That’s why it’s so important to understand how cash moves in and out of your business.
If your business is profit-rich and cash-poor, there are specific steps you can take to turn things around.
- Step 1: Look at this issue from both sides, cash in and cash out.
- Step 2: Turn sales into cash more quickly.
- Step 3: Reduce monthly cash payments.
Tackling the problem from both angles will help you make sure that your business has plenty of cash flow to pay you and deal with whatever comes up next.
Small businesses need cash at least as much as – often more than – they need profits.
Convert Sales to Cash
Most new business owners focus on getting customers and making sales. A lot of time that includes extending credit to customers. That can be a great way to boost sales, but may not increase the actual money you have coming in.
Every time you bill a customer, your business adds on a sale. That increases your revenues and your profitability. But it won’t improve your cash situation until the customer actually pays you. If you have slow-paying customers, your business could end up stuck in a cash crisis: You need to pay your bills on time even though your customers aren’t paying you on time.
So, how can you make sure your customers will pay?
It’s unlikely (probably close to impossible) that all of your customers will pay on time, every time. But there are things you can do to increase those odds: Make sure you’re only working with good payers and encourage them to pay you quickly.
Here are some strategies you can use to increase customer cash flow:
- Require up-front payments (full or partial) from new customers
- Consider running credit checks on new customers
- Bill customers right away
- Include very clear payment terms on your invoices, including the due date and how to pay – payment links are especially helpful here
- Make it as easy as possible for customers to pay you (accept online payments, for example)
- Offer incentives (like discounts) for prepayments or early payments (for example, customers can save 2% if they pay within 5 days of the invoice date)
- Follow-up quickly with customers who don’t pay on time – the longer you wait, the less likely they are to pay
Remember: Even your best-paying customers can have cash crunches and end up making late payments to your business. Other customers might regularly pay late, but always get around to it. And, unfortunately, some customers may not pay you at all. But by taking the steps list above, you’re more likely to get paid by most of your customers, most of the time, and mostly on time.
How to Credit Check Your Customers
Running credit checks on your customers depends on what kind of customers you have: businesses or general public.
Business credit reports are considered public information, so you don’t need permission from business customers to run their credit. For prospective business customers, you have three options:
With individuals, you need permission in writing before you can run their credit. You’ll also need some basic information about them, including their full name, date of birth, and Social Security number. Once you have that information, you can visit any of the three consumer credit bureaus:
All of these cost money. I know the point here is to increase cash, but this will be money well spent if you expect the total sales for that customer to be more than the report cost. You don’t want to spend your time, effort, or money on a customer who’s not going to pay you.
6 Ways to Free Up Cash
When your company is short on cash, you need to stretch out what cash you do have as far as it will go. That might mean missing out on some discounts for now, but it’s more important to keep your business in business until you have plenty of steady cash coming in.
Here are 6 tips for preserving cash on the expense side:
- Get a business credit card and make monthly payments (more than the minimum, less than the full balance due). Stay on top of the balance so you don’t run up unmanageable business debt. (Side note, this will also help build your company’s own credit history)
- Stop prepaying expenses (like insurance or app subscriptions) with big lump payments. Go month to month on everything you can.
- Don’t buy in bulk. Get the smallest amount of whatever you need rather than stocking up.
- Ask suppliers for discounts in exchange for early payment. (Sort of like the way you can encourage your customers to pay early by offering discounts, but from the other side)
- Lease space and equipment rather than buying it (which often calls for a cash down payment). Lease payments are (usually) 100% tax deductible, unlike loan payments, which will reduce your tax bill and free up more cash.
- Buy used equipment and electronics (if you prefer buying to leasing).
- Shop around for lower prices on business basics. This costs time but can save a lot of money.
Most of these are short-term strategies. They’ll help improve your company’s cash flow right now, but may end up costing more money over the long run. So once you’re in a more positive cash flow situation, you can start buying in bulk, scoring prepayment discounts, and going with convenience over cost when you want to.
To learn more about managing the financial side of your business, check out my book Accounting 101.
And if dealing with the numbers gives you a headache, let me make your life easier. Contact me today for a free consultation. I’ll take care of the accounting, so you can focus on what you love to do.