Finance Your Business
7 keys to avoiding a cash flow crisis
Steps to keep your small business financially healthy
Healthy cash flow is essential for the survival of a business, but busy entrepreneurs don't always take the time to establish sound cash management habits. These practices are especially important for fast-growing companies, where spending can quickly outpace revenue.
Consider the following tips to find ways to speed up cash flow and avoid crunches.
1. Create projections
Though it's impossible to predict exact inflows and outflows, setting time aside to regularly review and forecast your income and expenses is an essential habit to develop, says Chase Senior Vice President Don Maloney. Most bookkeeping software programs let you generate cash flow forecasts based on the information you've already entered, helping to streamline the process.
"It's really not that complicated, and you shouldn't overthink it," he says. "Look at the money you have coming in and the expenses going out on a monthly basis, and then make adjustments as the business changes and things evolve." If clients pay more slowly than they used to, for example, that change should be factored into new projections—or, conversely, if you find your cash position improving over time, you may want to move excess cash into a savings account to earn interest.
2. Establish clear terms
At the start of a relationship, let customers know how you plan to bill—for example, monthly, in installments or at project completion. This can help you avoid time-consuming misunderstandings later on. Try to keep payment terms short, such as 15 or 30 days instead of 45 or 60, and consider requiring a deposit for large orders or projects. When you send bills, clearly indicate the due date and include a prominent notification if you apply charges to late payments.
3. Speed incoming payments
Use electronic tools to issue bills and collect payments more quickly. An online invoicing service can save you time getting bills to customers, while accepting credit card payments and electronic funds transfers via the automated clearing house (ACH) service may spur faster payments. Your banker may also direct you to tools that help speed up funds into your account. For instance, Chase Express Funding allows small-business owners to receive funds from customers' card purchases the next business day, rather than the more typical several-day processing. Customers who have business checking and merchant services accounts with Chase can take advantage of this benefit. Chase QuickDepositSM allows you to deposit checks by snapping a picture of them. This checklist includes other tips for strengthening collections processes.
4. Control cash outflows
Time your outgoing payments so that you make them right before their due date. That enables you to hold on to cash as long as possible, and put it to work for your business. If several bills are due at the same time, try to work with your vendors to adjust or reset the billing cycle in a way that staggers the due dates. Making electronic payments via ACH can make it easier to control timing, as you can typically pre-schedule these to go out on a specific day.
5. Plan to bridge the gaps
Most companies encounter tough cash periods—for example, some types of businesses operate in cycles where outflows and inflows don't sync up smoothly. Planning for these periods can help you weather them more easily.
Having a line of credit in place allows you to tap funds as needed to meet working capital needs and pay interest only on what you use. These funds can also be used opportunistically to find savings, Maloney adds: A lot of Chase clients use the line to take advantage of early-pay vendor discounts. The discount may be more substantial than the cost of borrowing against the line of credit for a short time.
"Once a business has been established for two years, sit down with your banker and talk about whether a line of credit makes sense, and what type you could qualify for," he says.
6. Maintain a focus on sales
A full sales pipeline, powered by consistent sales and marketing efforts, is essential to keeping cash flow smooth and predictable. In a growing company, other demands can pull focus away from sales, so it's important to set aside time to sell and market your offerings. Some business owners block out times of the day to sell when nothing else can get in the way, while others set sales goals for themselves, which can keep marketing and sales on track.
7. Evaluate inventory
When you make your inventory as lean as possible, you free up more available cash. Review your sales to determine if your inventory planning process could use a tune-up. It can be tempting to take advantage of a big supplier discount by making a volume purchase, but do so only if you are confident that you will be able to use or sell all that you buy. Avoid carrying too many variations of a product, when most of your customers prefer just one or two specific models. Regularly review inventory and consider either writing down or discounting outdated stock.
Taking the time to monitor and refine your cash management practices can help prevent a damaging cash crunch and keep your business strong amid ups and downs.
Ami Albernaz is a Chase News contributor who covers technology, finance and small business-related topics. She is a former lifestyle columnist for The Boston Globe and contributor to The Christian Science Monitor.