Any small business must optimize its cash flow to operate efficiently in the short term and to remain operationally healthy over the long term. Many obstacles confront a business owner, or the leadership team, in optimizing the business’s cash flow. Here are five ways to solve problems with cash flow.
Forecast Cash Flow
A cash flow forecast records the business’s income and expenditures over time. The range could be days, weeks, months, or quarters. This close tracking provides a cash balance, which gives owners and leadership teams a view of the company’s cash balance at any time. With this information, owners and leadership teams can better understand when to pay certain expenses and ensure the business always has adequate cash to operate effectively.
Invoice on Time
Delaying an invoice can impact cash flow substantially. Depending on the particulars of a given business relationship, it may seem necessary to delay invoicing for many reasons. Except in special circumstances, invoicing on time and in the full amount will help keep cash flowing into the business. Efficient and timely invoicing also prevent issues related to outstanding A/R, which can be difficult to solve if it remains neglected for long enough.
Send Out Invoice Reminders
If you haven’t received payment on an outstanding invoice and there has been no other communication regarding the invoice, it is necessary to send out an invoice reminder to keep the outstanding invoice top-of-mind for the recipient.
Secure Credit Before It’s Needed
If the business is beginning to run into cash flow issues, it’s critical to figure out exactly what is causing those issues so that the underlying problems can be solved. As a proactive measure, in case of prolonged cash flow issues, it can be useful to secure a working line of credit before it’s needed. By the time cash is critically needed, it’s too late to work on securing a working line of credit on favorable terms. The best time to secure credit is well in advance of when it’s needed so that the business has optionality around providers and the specific terms of the line of credit.
While many other solutions to cash flow issues revolve around reporting and other procedural tactics, the most effective long-term solution to cash flow issues is increasing sales, increasing prices, or both. As long as margins can be maintained, adding additional revenue can offer flexibility in the day-to-day cash flow.
Cash flow issues may arise for many reasons, but for any owner or member of the leadership team, addressing these issues quickly and identifying the underlying cause of the issue can be the difference between improving cash flow quickly and the business developing long-term cash flow problems that become increasingly difficult to solve. If any of the cash flow problems or the solutions here resonate with you—reach out to Davidson Value Advisors to start a conversation.