Navigating a small business is like steering a ship on turbulent seas: the cash flow often fluctuates unpredictably posing a constant risk of financial instability for entrepreneurs. Therefore, maintaining a steady cash flow is vital for survival. In this article, we’ll explore six effective and proven strategies that small business owners can employ to stay afloat and avoid being sunk by a cash crunch.
Re-negotiate Terms with Vendors and Suppliers
Your relationships with your vendors and suppliers can be a lifeline, especially when cash flow is tight. Fortunately, there are several options to help you make the most of these partnerships.
- Seek Better Terms: Some small business owners are hesitant to try renegotiating more favorable payment terms and they shouldn’t be. There’s nothing wrong with asking partners to renegotiate terms that are beneficial for both sides. If you’re able to renegotiate, aim for longer payment cycles to keep more cash on hand.
- Explore Bulk Discounts: If you have the option of getting a discount through buying in bulk, do it, especially if you have the storage capacity and a turnover rate that justifies it.
- Consider Consignment Inventory: Find out whether your vendors and suppliers offer consignment options. These allow you to pay for inventory only after the inventory sells, which can help you keep more cash on hand.
Offer Customers Multiple Payment Options
When it comes to payment transaction options, variety is king. Offering multiple, flexible payment options to your customers can benefit your business in many ways.
- Early Payment Incentives: Discounts and bonuses can encourage customers to pay their invoices promptly or early.
- Payment Plans: If you can offer payment plans, you should consider it. Payment plans can help ease your customers’ cash flow concerns and make it less stressful for them to purchase big-ticket items.
- Electronic Payments: Electronic payments offer simplicity and efficiency for everyone involved. They can speed up the process of getting paid and reduce any delays in getting funds into an account, which is important in stabilizing cash flow.
Borrow Carefully
Debt can be a powerful tool for keeping your cash flow liquid, but like most powerful tools it needs to be handled with care. Before taking on debt, small businesses must consider:
- Understand the Total Cost: People sometimes rush into borrowing without understanding the total cost. Make sure you know the full cost of borrowing, including interest rates and additional fees.
- Avoid Overleveraging: Borrowing can sometimes seem like a panacea for all your cash concerns. It’s not. Only borrow what you need, when you need it and what you can comfortably afford to pay back.
Diversify Your Client Base
If you’re fortunate enough to have some big clients, it’s easy to become too reliant on their business. If one or more unexpectedly moves its business elsewhere, this can leave your cash flow vulnerable. Small businesses should look to diversify their client base to help protect from risk by:
- Broadening Your Market: If possible, consider expanding into new markets or demographics. This can help reduce the risk of significant cash shortages if one of your clients moves elsewhere.
- Offering New Products/Services: This is similar to the previous bullet, but if it seems like there might be opportunities to address the needs of a wider customer base, you should consider them.
- Focusing on Client Retention: Happy clients are great, but they can contribute to complacency. Make a point of seeking out new clients periodically and regularly checking on the satisfaction of your existing clients to help ensure a stable revenue base.
Monitor Your Cash Flow
Hopefully, this is second nature for you. Keeping a close eye on cash flow can help you spot problems before they escalate.
- Perform Regular Reviews: You should analyze your cash flow statements regularly to anticipate – and prepare for – future shortfalls.
- Implement Cash Flow Forecasting: Many companies use historical data to forecast future cash flow and plan accordingly. Forecasting can alert you to potential problems before they impact you.
- Keep Your Operations Lean: Ensuring your company is operating at peak efficiency is a great asset for a stable cash flow. So always look for ways to optimize and reduce unnecessary spending.
- Build a Cash Reserve: Creating a cash buffer can help you manage the ebb and flow of business income. You can do this by regularly allocating a percentage of profits into a reserve fund and reviewing expenses to identify savings opportunities that won’t affect operations.
Explore Business Financing Options
Taking a closer look at borrowing and ownership-sharing options, there are multiple ways to help fund your small business, and these financing options can deliver a much-needed cash boost.
- Traditional Loans: Talk to a local bank about conventional loans or lines of credit, two very traditional ways of financing your business.
- Alternative Lenders: Alternative lenders are known to offer more flexibility and quicker access to funds compared to traditional banks. They are a viable option if you need a fast response or don’t meet the strict criteria of traditional lenders.
- Investors: If you’re open to sharing ownership, seek funding from angel investors or venture capitalists. They can provide valuable funding in exchange for equity. They can also offer new connections and fresh expertise.
These cash-saving strategies can help give your small business the financial fortitude to weather turbulent times. Stay attentive, flexible and proactive in managing your financial resources. Good cash flow management requires strategic maneuvering and foresight that supports sustainable, long-term business growth.
Solomon Lax serves as the Chief Executive Officer at Revenued — a leading fintech that offers a small business card and Flexline based on machine learning scoring that is based on small business cash flow independent of FICO. Revenued also publishes a small business weather report with cash flow analysis and relative bank fee information derived from a panel of over ten thousand small businesses.