Growing Your Business
Will your small business thrive? Here's a quick way to know
When you first started your small business, you probably felt it was a scramble to pay every bill. A few years in, you may have found that your cash flow settled into a groove—or maybe it didn't.
The pattern of your cash flow may not be something you think about often. Yet, the way money comes in and out of your accounts can tell you a lot about the health of your business, and your prospects for thriving over the long term.
According to research from the JPMorgan Chase Institute, based on an analysis of 3.1 billion transactions in business banking accounts, there are seven common cash flow patterns—from regular revenues and expenses that occur weekly, to volatile expenses or sporadic revenues with a heavy dependence on financing.
Irregular cash flows are normal in the first years of a business. Over time, however, you should attain more consistent and regular cash flow—because businesses that don't, likely won't last.
"Small businesses don't fail because it's a bad business. They fail because of cash flow problems," says Chris Wheat, director of small business research for JPMorgan Chase Institute. "Cash flow management really affects the vitality and growth of small businesses, and the businesses most likely to succeed are those who are able to manage their cash flow effectively."
Businesses with irregular cash flow patterns in year three, for instance, are more likely to exit in year four than those with regular cash flow, the JPMorgan Chase Institute study found.
In other words, once your business is up and running, it's crucial to transition your irregular cash flow pattern to something more stable—and the sooner you accomplish that, the better. The following strategies can help:
Work with a budget
If you aren't working with a budget already, it's essential that you start. Use the past six to 12 months of income and expenditures to map out a strategy for the year, paying close attention to inventory, so you don't wind up paying extra for rush shipping or basic supplies.
Pay when you must
Unless you're getting a break for paying early or pre-paying expenses, pay all bills as late as possible without being charged any fees. That will keep more cash in your coffers in the meantime.
Create an emergency fund
As with your personal finances, having cash on hand in will keep you from incurring debt when something unexpected pops up. Plan to set aside regular money until you have enough to cover at least three months' worth of regular business expenses, including payroll and inventory. It may also be prudent to apply for a line of credit that would be available if you need quick funds.
Consider a split payment system
If it makes sense, offer a product or service for which customers could potentially pay an up-front deposit. You'll get more cash on the front end and suffer less if clients take longer to pay their balance. If your services occur over a lengthy period of time, you could even split payment into three parts—deposit, midway payment and final balance due.
Encourage early payment
The sooner you bill clients, the sooner you'll get paid (presumably), so it pays to be on top of billing. You might even consider online or email invoicing to make it easier for clients to pay you. And incentivize clients to pay quickly by offering a percentage off the total if they pay within a certain number of days. For instance, you might take 2 percent off the bill if they pay within five business days.
Deliver on receipt of payment
This isn't always possible, but if you offer a final product, require clients to pay in full before they receive it or gain access. For instance, if you're a photographer, all photos could be watermarked and low-resolution until customers pay in full.
Whichever strategy you choose, make sure it leads to expenses that are more regular and predictable. The more you can stabilize your cash flow situation, the better your chances for long-term growth.
Kate Ashford is a Chase News contributor who focuses on personal finance and whose work has appeared in BBC, MoneyWatch, among several others.