Common Business Cash-Flow Mistakes: Tips to Avoid Them

Every business has cash-flow bottlenecks, but if your small business is so tight on cash that you find it difficult to pay salaries or meet day-to-day expenses, then it is time to look for the causes and find solutions.

Here’s how to avoid some common cash-flow mistakes – and ensure that your small business stays in the red.

Not Evaluating Your Clients’ Credit History

You should check out your client’s credit history; if you don’t, it’s very likely that those with bad credit will delay their payments. If this happens, you should cut back on how much products you are supplying them with and at the same time bill them for the maximum.

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A Basic Lesson in Cash Flow Management

As business owners, we all know it's true: Cash is king! Without it, your business couldn't survive. That's because you need cash to operate and grow your business. How else will you ensure you're able to purchase supplies, pay your rent, advertise, hire employees or take care of the myriad other business activities that require money?

Cash flow is the lifeblood of any business, and it's imperative that you understand the inflows and outflows accordingly. So let's take a closer look at just how cash flow works:

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Should marketing care about cash flow?

Your marketing team needs to look at things differently to help you succeed in a tough market. Think of ways that you can make your customers feel more like part of a team that is helping each other get through these times. If you do that, your bill may not end up on the bottom of the pile.

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Improving Cash Flow in Tough Times

A common challenge for many small businesses is the feast-or-famine nature of managing cash flow. Poor cash flow can mean certain doom of an otherwise healthy business.

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Making Sense of Financial Statements

Day-to-day operations take up most of your time and energy, and you know you can't ignore the financial statements. You probably need some guidance in reading and making sense of them.

Financial statements are important because they can help to both uncover problems and identify corrective action. The most important financial statements are the balance sheet, the profit and loss (income) statement, and the cash-flow statement.

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Surviving a Downturn

From a business owner’s perspective, whether Maine’s economy is in a recession or not is somewhat immaterial. Like sailing the Maine coast, managing a small business in Maine’s challenging economy can be difficult even during the best of times. In the midst of an economic downturn, however, the activity becomes essential and doing it well is often the determining factor between staying afloat and going under. Whether good times or bad, businesses often find themselves in the middle of a cash crunch and need to know how to steer the business back to ‘safe harbor’.

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Does Your Business Need a Check Up?

by Heather Robinette

During difficult economic times, it is important to have a thorough understanding of the cash flow of your business. A business that’s experienced success and growth in the past may find that it isn’t operating as efficiently as it could be. One way to improve the efficiency and potentially increase profits is to conduct a financial analysis in which trends and margins are reviewed and compared to industry benchmarks.

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What Smart Leaders are Doing

Right now, the visionaries among us are engaged in a dual strategy. On the one hand, they’re looking inward to shore up their businesses internally. On the other, they’re looking outward, pouncing on opportunities created by the economic downturn.

Below are some steps that smart leaders are already taking.

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Positive Cash Flow is Critical for Small Businesses to Thrive

Columbia, Mo., April 15, 2005 — Ask any group of 10 small business owners what they consider the lifeblood of their businesses. More than likely all of them will say: "Cash flow."

"Cash flow is a significant issue for any business but it's an especially critical factor for small businesses, because when cash flow is insufficient it can cause a business to cease operation even though the business may be viable and profitable," contends Max Summers, director of the Missouri Small Business Development Centers (MO SBDC), part of the University of Missouri's statewide Extension program.

Consider the following pointers to improve cash flow for your small business:

* Practice timely billing - Send bills immediately following delivery of goods or services; don't wait for a 30-day billing cycle to charge customers.

* Speed up receipts - Give your customers incentives (or disincentives) to encourage quick payment of bills. Offer discounts for early payers or penalties for late payers or a
combination of both.

* Terms can trump price - Take care to negotiate the best payment terms possible with vendors. Frequently the cash-flow value of better payment terms can exceed the savings
value of lower prices. "Arrange for account terms that enable payables to minimize the cash needed to carry receivables," says Summers.

* Employ technology - Use financial software sufficiently matched to your accounting needs and cash-flow situation. Also use electronic transfers, when available, to make timely
payments on bills.

* Plan and project - Make financial projections for expenses and revenues on a yearly basis, and take into account available cash reserves in the process. Projections should cover
best-case and worst-case situations in addition to the most likely cash-flow forecast.

* Use loans appropriately - Consider taking a short-term loan from a financial institution familiar with your business to cover temporary cash shortages… but don't overuse or abuse
the privilege. And pay off such a loan in a timely manner.

* Renegotiate long-term loans. Better terms can improve cash flow by extending payments on principals. "Loan officers can be accommodating to reasonable requests for
consideration from valued small-business clients, as long as the client is forthcoming with pertinent information," says Summers, who is a former bank CEO.

* Sales: a double-edged sword - Increasing sales can be a boon to cash flow if billings cover cash terms. However, credit sales stretch cash reserves, causing cash to flow out
faster than it comes in when depleted inventories must be replaced.

* Improve purchasing practices - Suggestions for better buying include: refrain from big equipment purchases, such as electronic items, as long as possible; use lines of credit wisely
and pay them off before interest builds; buy in bulk when quantity price breaks are significant on useful items.

* Invest in your business - Marketing your business and providing selective training for yourself and your employees can pay returns by increasing business and improving cash flow.

* Value accounting expertise - The services of a good accountant can serve as an investment rather than an expense. Have an accountant review monthly and quarterly cash-flow
projections and results. Accountants also can help small business clients stay on top of quarterly tax bills with accurate projections of tax liabilities.

"While these suggestions are not comprehensive, they do offer small business owners several valuable ideas for improving cash flow," Summers says. "And positive cash flow can go a long way toward maintaining or improving the health of any business."

Source: http://www.missouribusiness.net/news/cashflow_041505.asp

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