Cash flow problems are the number one reason small businesses fail. Even profitable businesses can run into trouble if cash isn't available when needed. Here are five strategies to master your cash flow.
1. Create a Cash Flow Forecast
You can't manage what you don't measure. Create a 13-week rolling cash flow forecast that projects:
- Expected cash inflows (sales, collections, other income)
- Expected cash outflows (payroll, rent, suppliers, etc.)
- Net cash position each week
Update it weekly and compare projections to actuals. This gives you early warning of potential shortfalls.
2. Speed Up Receivables
The faster you collect, the better your cash position:
- Invoice immediately upon delivery
- Offer early payment discounts (e.g., 2% if paid in 10 days)
- Accept multiple payment methods
- Follow up on late payments promptly
- Consider invoice factoring for immediate cash
3. Manage Payables Strategically
Don't pay bills before they're due, but don't damage vendor relationships either:
- Take advantage of payment terms offered
- Negotiate longer terms with key suppliers
- Prioritize payments to critical vendors
- Consider using business credit cards for float
4. Maintain a Cash Reserve
Build a cushion for unexpected expenses or slow periods:
- Aim for 3-6 months of operating expenses
- Keep reserves in a separate account
- Replenish after use
5. Have a Line of Credit Ready
A business line of credit provides a safety net:
- Apply when you don't need it (you'll get better terms)
- Only use when necessary
- Pay down quickly to minimize interest
The Bottom Line
Cash flow management isn't glamorous, but it's essential. These five strategies will help you avoid the cash crunches that sink so many small businesses.