Cash flow is like the waves of the ocean…money going in and out of a business. In today’s economy, with continued high inflation and tariff uncertainty, maintaining adequate cash to pay your bills can be extremely challenging. According to a survey earlier this year by OnDeck, a small business lender, insufficient cash flow is the top concern to 29% of small businesses, and the second top concern for 26% of small businesses. Unfortunately, bad cash flow can result in business failure. The following are some ideas about how to manage cash flow, some of which were suggested by the OnDeck survey.
1. Understand and monitor cash flow
You may be doing a lot of business, with accounts receivable piled high, but this doesn’t guarantee cash flow. Only actual payments for your goods and services count toward cash flow. What’s more, your expenses are a drain on cash flow. So, to keep a handle on things, you need to monitor your cash flow on a regular basis. Forecast cash flow on a monthly basis, using at least a 3-month forecast. This can be done with your accounting solution or add-ons to them. Some offer push notifications on your mobile device when payments are coming up and/or cash flow is low.
2. Keep a minimum balance in your checking account
You need cash on hand to pay your staff and your bills as they come due. It’s essential to have at least one month of funds in the bank to meet your expenses. This is lean, but will get you by, at least for now.
3. Build up cash reserves
If your business is currently operating hand-to-mouth, build savings into your monthly budget…pay your business checking account as if it were a vendor or other creditor (you don’t actually make a payment; you leave the funds in the account for the reserve). Ideally, you can build up reserves to cover 3 to 6 months of expenses.
4. Use a business line of credit
If your business is financially sound now, you can set up a line a credit with a bank, credit union, or online lender. This can then be tapped as needed to cover expenses while waiting to get paid. Keep the line active by using it and paying off what you borrow.
5. Use personal resources
This isn’t the best solution, but something inevitable for some small business owners faced with a cash crunch. Your personal resources could be tapping into a home equity line of credit or borrowing from family and friends in an emergency. If you use these resources, be sure your correctly identify them in your books and records so they don’t appear as business income. Record them as loans or capital contributions you make to the business. If they’re loans, treat them as such (e.g., carry them on the balance sheet; have a repayment schedule; charge interest).
6. Improve your billing and collections policies
Adopt an immediate payment policy (e.g., use Square or other devices facilitating mobile payments at the time your work is done). But if you aren’t paid on the spot for your goods and services and have to send an invoice and wait for payment, do what you can to expedite the process. It can be done with QuickBooks and most other small business accounting solutions by offering customers and clients a variety of payment options (e.g., as credit/debit card, PayPal, and ACH bank transfers). The quicker you bill and receive payment, the better off your cash flow will be.
7. Delay payments to the owner or family until other bills have been paid
I knew this furniture maker who not only didn’t pay himself but took a side job as a short order cook in order to pay his employees and keep his business afloat. Fortunately, this was a short-term solution.
8. DOGE your expenses
Look closely at every monthly cost. The more you can reduce or eliminate, the less drag on your cash flow.
9. Prioritize payments
If you’re squeezed one month, determine which bill gets paid and which gets delayed. DO NOT FAIL TO DEPOSIT FEDERAL TRUST FUND TAXES, which are income tax withholding and the employees’ share of FICA. If you do, the IRS can hold you 100% personally liable for these amounts, plus interest and penalties.
10 Increase revenue
This may be easier said than done, but the flip side to cutting costs as a way to improve cash flow is to bring in more revenue. Look into additional revenue streams (e.g., new products or services; expanding into overseas markets).
Final thought
“Never take your eyes off the cash flow because it’s the lifeblood of business.”—Sir Richard Branson
Periods of uncertainty such as the one we’re in can really do a number on cash flow. Staying on top of cash flow can ensure you get through tough times.
Read more about managing cash flow in this list of blogs.
