Even the most successful small businesses can experience cash flow challenges from time to time. The most common factors that can lead to bottlenecks in your cash flow are high overhead costs, late payments, and excessive inventory.
When your business experiences cash flow bottlenecks, it could mean delays in paying vendors or employers, less cash to invest in growth, and other risks to your company’s future. By clearly understanding your company finances, you can take the necessary steps to improve your small business’s cash flow.
Review cash flow forecasts
Looking at cold, hard data can help you see what may be the biggest causes of bottlenecks in your business’s cash flow. That’s where cash flow forecasting comes in. This process of estimating when cash goes in and out of business over a certain period helps you predict any potential shortages in the future.
Efficiently forecasting cash flow can help your business see the trends regarding cash shortages or surpluses and identify bottlenecks. For example, you notice there will be a cash shortage in several weeks because client payments have been slow to come in. You can use this knowledge to make changes, such as finding ways to remind clients to pay or infusing an inflow of cash in the next several weeks.
Using technology to automate much of the work of reviewing cash forecasts and analyzing trends can free up your time.
Cut non-essential expenses
Businesses may incur more expenses as they grow, though not all expenses will be necessary at all stages. Taking the time to scrutinize the cost to run your business will help you keep spending under control. Consider what is essential, what is nice to have, and others you can cut out. Identifying what’s unnecessary will help you make a plan to cut down expenses while still maintaining operations.
Assess and revamp account receivables processes
Late payments can wreak havoc on your small business and are a major bottleneck to your cash flow. A priority for all businesses is to create systems to help ensure customers pay on time and in full.
To start, look at your account receivable (AR) processes—specifically, your average DSO (days outstanding) to see how soon customers and clients pay after a sale. Then, determine the percentage of late and non-payments.
Once you have this information on hand, consider the following questions to help revamp your AR processes:
- How does my business collect payments, and is there an easier way for my customers to pay me?
- What incentives do I have in place to encourage customers to pay early?
- Do I have reminders to notify customers when their payments are due?
- Is it possible to shorten my payment terms with new and existing customers?
Look at your current pricing strategy
Even if sales are good, having a more significant profit margin can help reduce some bottlenecks. Set aside time to review your current products and services regularly to see if you need to change your pricing strategy. If you’ve been offering discounts or other financial incentives, consider whether the potential increase in sales volume will help your cash flow.
Determine whether you need reserves during different seasons
Some small businesses may experience peak sales and lulls during certain times of the year, particularly industries affected by seasonal changes like ski tourism companies. If that’s your case, it’s essential you anticipate when the lulls may occur and come up with a plan to remain cash flow positive.
Even if your business sales don’t fluctuate heavily based on seasons, it’s still worth looking at sales trends. Whatever your industry, your business may experience forces out of your control, such as losing your biggest client or your vendors drastically increasing prices and your overhead increases.
Looking at trends or anticipating sales lulls can help you determine whether you need to build up reserves or consider other funding options.
It pays to plan ahead
Taking a proactive approach to your business financial planning is the key to improving cash flow. Once you identify bottlenecks in your business and implement strategies you think will improve cash flow, monitor your cash flow forecasting reports regularly. That way, you can determine what works and anticipate any upcoming challenges you can address immediately.
Sometimes, looking at funding options with commercial lenders may be necessary to help with gaps while you’re fixing cash flow problems. Take the time to find a lender that understands your industry and takes the time to address your business’s actual needs.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. Valley National Bank does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. All loans products are subject to credit approval. Additional terms and conditions apply. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
