Small Business Financial Article

It’s not at all uncommon for small businesses to experience significant swings in cash flow during the year - going from cash-flush to cash-crunch within a matter of months and repeating the cycle a few times throughout the year. There can be several causes, including the natural ebb and flow of the market, seasonal factors, or receivables that get backed up.

The challenge for business owners is being able to cover operating expenses during the thin months while having the cash available to seize on new opportunities. Finding ways to smooth out cash flow can mean the difference between struggling to survive and being able to grow your business to the next level.

Here are five tools and techniques businesses use to smooth out their cash flow:

Model Cash Flow Weekly and Forecast Monthly

Business owners typically create monthly forecasts, which helps to plan cash flow over the long term. But, if your business experiences a more frequent or deeper ebb and flow of cash, you need a more detailed model that tracks outgoing and incoming cash. This is best accomplished with a weekly model that can identify structural issues that lead to cash shortfalls, such as the timing of payments and invoicing.

With a better grasp of your weekly cash flow, you can increase the accuracy of your monthly forecasts. By modeling your cash flow weekly, you can more easily tweak your forecasts so they can provide a more accurate picture of where you’re headed.

Get Creative with Your Payments

When you anticipate a cash flow shortfall, look to your vendors’ payment terms as a way to stretch payments. For example, if you have 30 days to make a payment, wait until the final day, and then use a credit card to make the payment. This additional float can double the amount of time to collect the cash you need from customers.

Offer Incentives to Pay Early

As a small business, you are often forced to set up favorable payment terms to be competitive, which usually means having to wait 60 days or more for payments. You can incentivize your customers to pay early by offering discounts, such as a 5 percent discount if they pay within ten days or a 10 percent discount if they pay within five days. It’s an additional cost of doing business, but it beats the cost of losing favorable payment terms with vendors when you consistently pay them late.

Have a Ready Source of Capital

All businesses, large and small, need a ready source of capital they can tap when cash is tight. A business line of credit can be an excellent cash management tool because it’s immediately available, offers payment flexibility, and businesses can control their interest costs by borrowing only what they need at any particular time. The best time to obtain a line of credit is before you need it.

If your business can’t qualify for a line of credit, consider establishing a relationship with an invoice factoring company. Through invoice factoring, a business sells its receivables to a factor that then assumes the responsibility for collecting from the customer. When the invoice is paid, the factor deducts a fee for its services.

Tweak Customer Payment Terms

If you’re a project-based business, increase the down payment you collect to start projects. Instead of collecting 25% down to start a project, ask for a 40% or 50% down payment. This may be easier to do with new customers than existing ones, but they may be open to a small increase if you have solid relationships.

For longer projects, increase the number of milestone payments. Instead of collecting an upfront payment and a payment upon completion, add a payment milestone in the middle of the project, especially if the project is expected to run more than a month.

Partner with your Bank for More Creative Solutions

Your best resource for smoothing out your cash flow can be your business bank which can offer large-scale cash management solutions in ways that weren’t imaginable a few short years ago. A good business bank wants to be a partner in your success, so building a relationship early on can help you expand your options when times get tough.