What’s the most common reason for a small business to close its doors or for a budding startup to fail before catching on?
Here’s a hint, it is not losing to rival competition, not even close. It turns out that most small businesses fail by simply running out of cash to pay for operations.
Note that running out of cash is different than being unprofitable in fact many of these cash-starved businesses that failed were profitable. But a business that is profitable on paper doesn't necessarily have enough money in-hand or in the bank to pay employees and utility bills when these payments are due.
Cash is the currency needed to run the day-to-day operations and without it, there’s no fuel to move your business forward. “Cash flow is king” as the saying goes.
Many small business owners, you included, may think they need a loan to help keep up with employee payroll and utility bills so the doors stay open. But if cash flow issues are the underlying issue, loans and other financing options are only band-aid solutions because they miss the root cause.
Think your business could clean up its cash flow management act? Well, if so, one or more of the following four facts of better cash flow management may help. Read on!
1. Adjust your payment terms:
How quickly do your customers pay you? For businesses that bill their clients after the product/service has been provided and offer a grace period of 30 to 90 days for payment, you might be able to bring in more cash sooner. Try offering discounts for payments that are made earlier that the deadline. Or try calling customers with outstanding payments more frequently to remind them to their payment is due soon.
2. Keep records to know where you stand:
Business is busy. There’s so much to do. But focusing on operations and neglecting basic accounting and record keeping will leave you blind to how your business burns cash. Do you know how quickly your cash on hand can deplete? Bank records aren’t enough, it is critical to have a spreadsheet to display historical data from business revenues and costs to determining a safe cash balance for the future.
3. Bring in more sales sooner:
This may seem obvious but if you’ve overlooking a sales generation strategy when cash is tight you’re missing a strategy that could save your business. The key here is to use sales sparking strategies that don’t cost any cash but maybe cost some profit. Wait… Isn’t that the same thing? Not quite, here are two sales generation strategies that don’t require upfront spending.
A: Basic sales promotions will spur more volume and bring in more cash as long as the discounts aren’t too deep. This will decrease your average profit margin but if cash is tight that’s a sacrifice that can save the business.
B: Bulk order discounting (or deeper discounts) can help push existing customers to buy a higher quantity than they usually do. It will decrease your average profit margin, so be careful but it won’t cost you cash today.
Now it’s important to mention sales generation strategies that cut into your cash (not just profit). These are sales generation strategies that cost money today like running a radio advertising campaign or paying for a billboard on the highway.
4. Taking a loan? know the pros and cons:
Seeking a loan is, of course, another option but remember, loans used to pay off expenses aren’t going to solve the cash flow problems. The up-front sum of money you receive from a lender comes with an obligation to make fixed payments for a number of months into the future. Plus you have to pay interest too. If you take out a loan, use it to grow your business and your cash generating potential that way you’ll have more money flowing through the door of your business in the future to help meet those obligatory loan payments.
These are just four basic strategies to improve your businesses chances of surviving a period when cash is tight. Not all will increase profits or your business balance sheet valuation, but they might help save you from having to take out a loan to pay off utility bills.
We are a student non-profit organization. We apply our time and knowledge to helping solve business and non-profit challenges. This blog contains information we've synthesized from research relevant to small business owners looking to improve his or her business.