6 Tactics to Take Your Business from Cash-Starved to Healthy Growth.

Better small business cash flow management leads to small business growth

Many small businesses operate in a mode where they are always dealing with day-to-day business crises or issues, that, often, leave them in a cash bind.

That could be late supplier shipments to waiting for a big customer payment to having to make periodic tax payments to having to spend money on capital expenditures for critical plant and equipment. Typically, they are not managing their cash flow very efficiently.

Cash for your business is like food for your body. It is the fuel that enables growth. But, like the body, without sufficient food and a proper diet, a business without sufficient cash and good cash management will not only not grow, but could become unhealthy and even die!

And to continue the metaphor, to get and stay healthy, you need to track what food you put into your body and how you burn that through exercise and activities, so you know how your body uses it. Same thing with your business and the cash it uses for fuel.

Here are six tactics to not only ensure better cash management but to get your small business from cash-starved to healthier to healthy growth. They are simple on the surface, but can have a far-reaching impact on your business’ growth once executed:

1. Make sure you have (and use) an automated accounting system.

Believe it or not, I have seen million dollar + businesses still operating with an accounting system on Excel spread sheets. If you haven’t made the plunge, time to do so. I have touched on this previously. There are, at least, a half dozen products that cost less than $50/month as web-based versions and less than $500, one-time, for desktop versions. Find one that works for you and begin the process to get your numbers in order. And whether you use it or you hire a bookkeeper to use it, keep it current – updating no less frequently than weekly, if not daily. It’s your overall scoreboard.

2. Cash generation starts with timely invoicing.

Many entrepreneurs miss this very simple point. You can’t collect a payment until you bill for it! Unless your terms say otherwise if your customers are paying you in 30 days, their clock might not start until they GET the invoice, whereas yours starts when you send it. Fix both of these with two simple steps. Invoice within 24 hours of contract signing and email the bill.

As a corollary to these two, wherever possible get a deposit with an initial contract signing. And as a further corollary, get the customer to either wire transfer or ACH the deposit. Hey, the sooner you get the cash, the faster you can use it!

3. Cash generation ends with timely collection.

Again, same point as above. The sooner you get your cash, the sooner you can use it. Consider terms for key, long-term customers (e.g. 2, net 15 – 2% discount if the invoice is paid within 15 days). Consider suggesting ACH as a standard means of payment. It will cost you a little money to maintain the service on a monthly basis (usually less than $75/month), but it means no checks for deposit since the money goes right into your account. Most customers will already be using it for other vendors or their customers.

Additionally, use your accounting software to generate a periodic (weekly) accounts receivable report to help you track outstanding invoices. Never let a client get into even the 30-day category without a gentle but firm call to determine when you can expect payment. And stay on them both by phone and email until they pay. Worst case, if they are have cash problems offer them terms, but get an immediate payment of something.

4. Match average payment time with average collection time.

Your accounting software will calculate your average collection time for your accounts receivable. It will also do the same on the payment side (i.e., how much time you are taking to make your supplier/vendor payments). Try to align the two as closely as practical.

Too often I have found small businesses that pay their invoices in 15 or 20 days, while their collections are averaging 45 days. That’s a cash flow crisis in the making!

5. Make payment terms part of the way you do business with your suppliers/vendors.

In short, hold your cash for as long as possible. And when you have to pay, try to do it at a discount (much like we described going the other way with your vendors). Don’t be afraid to negotiate better terms from suppliers/vendors. They’re used to it because they do it.

The better your terms, the better you can apply your cash to your business. Do this, especially, when you’re in a cash crunch. It will help that crunch by getting agreement to spread a large payment. And once you’ve done it, your supplier/vendor will have more confidence in your ability to pay and your word. This can lead to overall better terms.

6. P&Ls are nice as a scoreboard, but manage your business with a cashflow forecast.

Every single business I have ever run, from my own to those I’ve turned around for others, to those I have advised, wherever possible, I have implemented what I call “A Rolling Eight.”

That’s an eight-week cash flow forecast created in Excel (you could also use Google Sheets) that reflects all sources of cash and uses of cash projected for the next eight weeks. The more detailed, the better. Update it on a weekly basis with actuals for the current week and extended an additional week on the backend; hence the “rolling” aspect.

I’ve found, over the years, that eight weeks is about as far out as you can project how cash is coming in versus cash going out. And the long and the short of it is, it has been successful every single place it was implemented; often improving cash flow by 50% or more over an initial 90-120 days. So make this part of your healthy growth diet.

Cash is the fuel that drives business growth. If you can learn to better generate it, better collect and manage it, then growth is yours. Simple concept. But like our body, getting and maintaining good health requires the right fuel, managed the right way, it’s easier said than done. You just need to focus on the six tactics that we’ve described, and you will be on your way to healthy growth.

"The Entrepreneur's Yoda" knows these things. He's been there. May success be with you!

Has your business ever suffered from being cash-starved? Please share your thoughts in your comments. It can help another entrepreneur or small business owner.

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