Avoid the Squeeze: How to Maintain a Healthy Cash Flow in Your Business
Cash flow – the key to success for any business – must be maintained in order for your company to be successful and remain in business. It can be difficult to continually monitor cash flow, and if your business is cyclical or seasonal, you must take extra steps to keep your cash flow positive even during the slower months. Whether you are looking for added tips or your are trying to rebuild credit for your business in Southfield post-bankruptcy, we can help you learn how to best maintain your business’s cash flow. Here are some tips to help your business avoid the cash flow squeeze.
Foresee Future Needs
Some surprises are good, but being surprised by no cash flow can be a devastating blow to a company, especially a small business with limited access to capital. The best way to prevent surprises is to forecast your business’s needs well in advance. Make sure to keep accurate accounting records so you know what is coming in and what is going out. Calculate cash flow for the upcoming six months or year using the figures from the previous time period. Dissecting previous financial statements can help you spot trends that will allow you to avoid potential cash flow issues down the line.
Work with Your Lender
Don’t wait until you need cash to seek out a loan from your bank. Banks want to loan money to profitable businesses that have a high chance of repaying the loan. A company in dire straits isn’t a good investment. So if you find your business in this situation, consider using these assets to help your company improve its chances of obtaining a loan.
One such way is using accounts receivables (AR). Your business can use its AR to obtain a line of credit. Normally lenders set this line of credit at 60%-80% of the total AR. Since most accounts receivable are due within a 90-day period, this is a very popular way to get cash in the short term.
You can also sell your accounts receivable to a third-party company that will give you a percentage of your AR. This process is called factoring and is an alternative to borrowing on your ARs. Each contract will differ, depending on your type of business, your vendors, and your company and vendor’s credit worthiness.
Maximize Inflows and Minimize Outflows
Managing cash flow can be a balancing act, and the challenge is to maximize inflows while minimizing your outflows. This might seem difficult, but there are several methods to help you stay on top of your cash flow.
To maximize inflows, look for ways your company can create monthly revenue. If you sell a product or service regularly, set up a monthly subscription so you can receive monthly income. If your company sells unique or custom products, require a security deposit in order to start the order.
At the same time, you need to find ways your company can minimize outflows. Some outflows are static, such as rent, salaries, and utilities. However, many expenses can be lowered with some forethought. For example, if a piece of equipment stops working, look into repair before considering replacement. Also, try to barter for services when possible. Many companies and vendors are willing to trade products and services, so consider this option before opening the company checkbook.
Positive cash flow is essential to keeping your business out of the red. Using some basic forecasting methods can keep your cash flowing and out of bankruptcy court. If you are looking for ways to increase cash flow, we may be able to help. In fact, we’re hosting a business planning workshop in August! Click here to learn more.