5 Ways to Maintain Your Cash Flow While Starting a Business
Nobody expects their business to fail, but failure is an unfortunate reality for a large percentage of startups. According to CB Insights, running out of money is one of the primary reasons startups fail before they get off the ground. If you don’t get a handle on your cash flow, you’re likely to join those ranks.
Here are 5 ways to prevent running into cash flow problems:
Re-evaluate client and supplier contracts
If you deal with client contracts in your business, re-evaluate those agreements to see if your terms are working. For supplier contracts, find out if you might be missing out on a discount for paying early. Are competing suppliers offering better terms? If the answer is yes, consider switching. For client contracts, make sure they’re performing to your terms.
Get a partially amortized loan
When running a business, you need to free up as much cash as possible, and save money wherever you can. You may not realize it, but it’s a good idea to examine every area of your life where finances are concerned. If you’re investing in real estate for profit or even buying a home to live in, choosing your loan wisely can save you some serious cash.
This guide to partially amortized loans published by Assets America explains that a partially amortized loan provides benefits to the lender which are then passed on to the borrower. For example, you can usually get a larger loan because there’s less risk of rising interest rates. Terms are shorter and the money is recovered faster. Also, the lender doesn’t need to require a large down payment. Your payments will be smaller and the lender can also charge a lower interest rate. This will help you maintain better cash flow.
Enforce payments owed to you
If clients are missing payments, start enforcing your terms. Don’t let anyone slide on their payments. Sometimes businesses will only pay invoices on their preferred schedule so you need to set expectations with clients and follow-up often. When a client consistently pays late, reach out to find out why. There might be invoice disputes you aren’t aware of that take a while to resolve.
Sometimes the best way to enforce payments is to improve your collection system and the methods used to request payments from clients. Sometimes impersonal email reminders aren’t enough to do the job. Be brave enough to call your clients and get them to commit to paying their invoice. Don’t hang up until you get a specific date and time they promise to pay.
As hard as it might seem, set consequences for missed payments. If a client has not experienced any consequences for missing a payment, they’ll continue to ignore your reminders, dodge your calls, and not return your messages.
Have a cash reserve on hand at all times (and continually add to it)
Maintaining a cash balance in a savings account is crucial to keeping your business afloat. There will be times when you’ll need access to cash for unplanned yet necessary purchases. A reserve ensures you don’t have to miss out or take out yet another loan with more interest payments to cover the cost.
Be sure to add to your cash reserve every chance you get. It doesn’t matter if it’s $10 this month and $100 next month – just keep that reserve growing.
Check your cash flow status daily
It might sound like overkill, but checking your cashflow status daily is always a good idea. It will take less than ten minutes if you do it at the end of your working day. It’s not enough to have a general idea of where you’ll be at the end of the month. You need to know your projected/expected cash flow for every day of the month at any given time. Every day you need to enter and adjust your payments received and made to get an accurate picture of what your cash flow will be for every day of the month.
The benefit to committing to this daily ritual is the peace of mind that comes from knowing well ahead when you might run into trouble, which gives you time to do something about it. For example, say you close your day today and notice you’re going to be $4,000 in the red fifteen days from now. You’ve got fifteen days to call in invoices early or extend your payables.
Don’t focus too much on profits
Cash flow management issues can sneak up on you even when you’re raking in profits. Always keep one eye on profits, but keep both eyes on your cash flow.