One harsh reality of owning a business is that you could make a profit and still run out of money. Cash flow problems are business killer — in fact, a U.S. Bank study found that up to 82 percent of startups and small businesses go under because of it.
It’s especially difficult when you’re a new business owner going from receiving paychecks every one or two weeks to 30- to 60-day payment periods. You can’t pay bills due today with your accounts receivable. That’s why you need to manage your finances properly and plan for potential cash flow problems.
Avoid cash flow problems with these 4 steps
With these four steps, you can better manage your finances to mitigate potential cash flow problems.
Set clear payment due dates.
Stay on top of your business’s finances.
Use credit to your advantage.
Obtain funding through your invoices.
Ready to learn more? Keep reading.
1. Set clear payment due dates
Unfortunately, there’s no way to guarantee that clients pay on time, short of charging them up front. You can, however, reduce the likelihood of late payments by writing contracts with clear payment due dates. Other ways to incentivize clients to pay on time are charging late fees or offering a discount for early payments.
Whatever you do, make your payment terms easy to understand so there’s no confusion or frustration on the client’s part.
Depending on your industry, you might be able to charge a portion of what you’ll be owed before services are rendered. For example, you could have clients pay 50 percent up front and the remainder within 30 days of a project’s completion.
2. Stay on top of your business’s finances
Bookkeeping and budgeting are often difficult for business owners. When you’re already under a heavy workload just trying to grow your business, you probably don’t want to spend much time keeping your books organized.
The problem is that failure to organize your finances and plan ahead can lead to all kinds of issues.
Unpaid invoices could slip through the cracks. You might not accurately forecast how much money your business will need or how much sales will dip during a slow period. Use an accounting program to log all invoices and expenses. Before every quarter, estimate what expenses your business will have and when you’ll need to pay them.
Project when you should receive payments from clients, and consider contingency plans in case one or more clients don’t pay you promptly. If finances aren’t your forte, consider hiring a bookkeeper to help. Even paying someone for a few hours of work per week can help avoid cash flow problems.
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3. Use credit to your advantage
Credit is a valuable tool for both paying your business expenses and stretching your finances if you’re short on cash.
It’s a good habit to put all the business expenses you can on a credit card (ideally a business credit card) for two reasons:
- Credit cards are the only payment method that will earn you cash back or other rewards.
- When you make a payment using credit, you have more time before you need to hand over any of your money.
If you pay for an expense in cash on January 15, that money is gone. But let’s say you pay for it using a credit card instead. You’ll have several weeks before your credit card payment is due, giving you more time before you’re out any money.
With a little planning, you can even save your largest expenses for immediately after your card’s statement closing date, maximizing how much time you have to pay off those purchases with no interest. And if you need even longer, you can move your balance over to a balance transfer card.
4. Obtain funding through your invoices
This isn’t advisable on a regular basis, but desperate times call for desperate measures. If you need money immediately and you have unpaid invoices, you can use them to receive funds through either invoice factoring or invoice financing.
Invoice factoring involves selling your invoices for their total balance minus a fee, which is typically two to six percent. The factoring company then collects on those invoices.
Invoice financing involves using your invoices as collateral for a loan. Loan terms and annual percentage rates (APRs) vary significantly depending on the lender. The advantage of invoice financing is that you keep control of your invoices, whereas with invoice factoring, your clients will be dealing with the factoring company, potentially affecting your reputation.
Running a financially stable business
With proper prep work and financial management, your business is far less likely to experience any cash flow problems. It’s still smart to have cash reserves in case any worst-case scenarios strike. But if you don’t, credit cards, invoice factoring and invoice financing can all come through in a pinch.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.