Business Financing

Working Capital Management

5 Ways to stay cash flow Positive as your Business Grows

Business Owners Pointing at the Computer

Cash flow management is often cited as one of the main threats to the success of a small business. This is especially true for a growing business. In this guide, we set out to help you navigate the rough waters of a business expansion by outlining five essential aspects of cash flow management that every business owner should be familiar with.

1. Cash Flow Projections

Carefully project incoming cash flows at least six months out by calculating the average monthly receivables and projecting accounts receivable collections. Pay especially close attention to the payment terms you have negotiated with your customers and plan conservatively by adding a 15-day buffer to the terms. If you have smaller customers it is important to add additional safety margins into your calculations to account for the possibility that your customers are unable to pay on time. Here is a great Google Sheets Cash Flow Template of a 12-month budget that you can use in your business to get started.

2. Spend Wisely

Keeping a close eye in your cash outflows is an essential part of good cash flow management. This doesn’t mean spending less, you have to spend money to make money. However you should be disciplined in how you incur expenses. Strive to stay consistent in the expenses that you incur. This way your negative cash flow will become relatively predictable. The combination of predictable expenses and an accurate cash inflows projection, will put you in a better position to control your monthly cash flow.

At some point in the life of a company, every business owner discovers that certain months will have significantly lower projected cash flow than average. In these cases, it is important to take early action towards reducing non-essential expenses for that period or begin applying for an operating line of credit. Being honest with yourself can be critical in these situations. Take some time to understand in detail the criteria that your bank will use to evaluate your application, and anticipate that the application process may take anywhere from several weeks to several months.

3. Early Payment Discounts

As you prepare your cash flow projections you may discover that long payment terms are a major chokehold on the cash flow of your business. If this is true for you, you are certainly not alone. Many businesses consider the management of their age of receivables as one of their top priorities. You can shorten the amount of time that your customers take to pay you after you invoice them by offering cash discounts such as 2/10 Net 30. This means that you will discount 2% off the price of the invoice if the customer pays within 10 days, otherwise the payment term is 30 days.

4. Negotiate Intelligently

Come to new negotiations prepared with a clear understanding of the implications that each potential concession will have on your business. Oftentimes a retailer will be open to reducing their service fees in exchange for extended payment terms. Other times, they may prefer to take advantage of standard 2/10 Net 30 discounts to improve their margins. There is no right answer; the best option depends entirely on the amount of capital available to your business from internal and external sources and on your cost of capital.

It is also important to know the maximum number of days that you can afford to have your invoices outstanding. Come prepared with a maximum discount that you can offer in consideration of your margins, as well as your average collection period (ACP) with your other customers.

ACP = ( AR/ Credit sales ) x 365)

5. Secure Alternative Sources of Capital

Smart business owners always plan for the unexpected. No matter how closely you manage your cash flow, there is always the possibility that unexpected new orders or unplanned expenses will lower your cash flow. In these situations, it may be too late to obtain a bank loan so it is crucial to have alternative sources of short term capital available.

To avoid wasting time and resources, consider determining whether your business is eligible for an operating line of credit with the bank before you need the money. If your business is relatively new, or if you operate in certain industries, there is a very real chance that the bank will not be in a position to extend you a loan. In this situation, you can turn to solutions like FundThrough. If your business sells to major retailers, we may be able to extend you a line of credit against your accounts receivable at no cost until you decide to draw any funds.

For many businesses invoice financing is the best alternative to a bank loan. Many of our clients think of us as a more flexible source of short-term capital that can help them grow their business faster and qualify for their first bank loan much sooner. Our application process is straightforward and our approval criteria are based on the credit rating of your customerOur fees are completely transparent with no strings attached.

Cash flow management is an extensive topic and with plenty of room to expand your knowledge; however, today have learned the basic concepts that you will need to navigate the rough business waters and stay cash flow positive. Working with a major retailer can be the beginning of a lucrative business journey. FundThrough is here to help you accept every new order without losing control of your cash flow.

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