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By Benetrends • May 28, 2019

How to Avoid Cash Flow Problems for Your Small Business

For many small businesses, especially those just starting out, cash flow is a classic challenge.

Businesses starting out do not yet have the customer base and revenue flows established that allow for steady, reliable cash flow. Yet, as noted in the recent post, Entrepreneurial Dilemma: Do I Have Enough Money to Start My Own Business?, businesses still have many financial obligations that need to be met, no matter how much cash is in the coffers.

What can small businesses do about this issue? Careful planning and a clear understanding of cash needs, especially during their first year of operation, is the key to not being stuck in a cash flow conundrum. 

Below are some helpful suggestions for how to avoid cash flow problems for your small business.

1. Understand the Drivers of Cash Flow

Your profit-and-loss statement is not a good indication of your cash flow position. Cash flow depends on several other factors, including your accounts receivable, accounts payable, capital expenditures, inventory levels, and tax rates. You need a clear understanding of where your business stands in each of these cash driver areas to understand your cash flow.

2. Recover Receivables

You need to be sure your customers are paying you as quickly as possible. That means billing as early as possible and making sure your invoices are as detailed and as clear as possible. Don’t wait until the end of the month; invoice for goods and services as soon as they’re delivered.

3. Don’t Overestimate Future Revenue

Optimism is a good thing, but be sure you do not overestimate your sales. Make sure you use historical evidence (even if only in business for a short time) and real numbers to create realistic sales forecasts. In the early years, your accountant or mentor can help with accurate projections.

4. Delay Your Payables

Do not pay your accounts payable too early, especially when your business is new. You want to delay as long as possible without incurring late fees or damaging your relationships with suppliers and partners. This strategy lets you keep cash in your bank account and use it for as long as you can.

Charts and graphs on documents and mobile phone.

5. Have a Past-Due Strategy

You will need to be proactive in your approach to past-due receivables. If you are depending on those payments to cover your own expenses, you need those dollars when they’re expected. Neglecting this area can quickly put your business in a negative cash-flow position. 

6. Be Frugal With Spending

The start of your new business is not the right time for impulse purchases. Sure, an espresso machine in your waiting room would be nice to have to offer your customers, but it’s probably not necessary.

7. Prepare With Available Cash 

Businesses can consider using lines of credit or business loans to cover cash flow issues. However, those solutions are, in themselves, costly.

Benetrends offers another option. Its Rollover as Business Start-Ups (ROBS) small business funding strategy helps businesses use their existing 401(k) or other retirement funds to provide financial flexibility, especially during the early years. To learn more about how Benetrends can help alleviate your cash flow challenges download The Definitive Guide To 401(k)/ROBS Business Funding.