New business owners often fall into the trap of only considering their cash flow when their reserves are low. In the world of small business owners, however, “cash is king”, and it pays to think and act proactively.
Often, when businesses struggle with their cash flow, getting paid isn’t the problem – it’s when. Uneven cash flow is a taxing experience for business owners, with a wide range of resulting consequences: delayed employee paychecks, missed bill payments, or stalled growth due to a lack of inventory or ability to take on new clients. Many owners wonder how they can avoid putting their business at the mercy of clients and the timeliness of clients’ checks.
Shegar Thirumalai, a serial entrepreneur and owner of a San Diego-based security company, found a way to solve the problem of lumpy cash flow. He sought working capital even before he had a need for financing. Thirumalai pointed to his previous experience when asked why he originally sought financing and said, “Even if I don’t need it now, I will always have a reserve. It’s worth it, even if you have to pay a little interest.”
With available financing in his back pocket, Thirumalai was recently able to land a large client who wanted his services — starting the next day. Thirumalai used his business credit line to cover the $20,000 in payroll he needed for the project, when cash from his client wasn’t going to arrive quickly enough.
Here are three recommendations on how small businesses should think about cash flow based off the experience of successful entrepreneurs like Thirumalai:
1. An Ounce of Prevention is Worth a Pound of Cure
Time is a small business owner’s most valuable resource, and it’s better spent growing and managing the business rather than fixing a cash-flow crisis. Spending time managing business operations is difficult when you are constantly coordinating outgoing payments with incoming client checks.
Having working capital in place, whether it’s for a cash reserve or funding source, gives you breathing room so you can focus on your priorities and sleep better at night. Financing options like invoice factoring allow your business to free up cash stuck in client invoices so you can seize opportunities as they come, instead of waiting or passing on new projects.
Regardless of the size of your business, spending your time on the front lines of your company instead of in the back office doing administrative tasks is almost always a better use of your time. In Thirumalai’s case, having a source of funding in place allowed him to take a tremendous growth opportunity instead of having to turn down a major new account.
Preparing in advance also allows you to negotiate from a position of strength. Looking for financing during a crisis can put you into situations where you’re forced to work with shady financiers. Many short-term lenders use confusing terms or long-term contracts with hidden fees to lure in clients who don’t have time to do their research.
The actual cost of short term financing is often disguised by hidden fees. Additionally, signing on to long-term contracts mean that your business’s need for a short-term solution turns into a long-term drag on your company if you’re required to meet financing minimums. Just like you shouldn’t go grocery shopping when you’re hungry, you shouldn’t look for a cash flow solution when you’re most vulnerable.
2. Examine the Net Gain from Financing, Instead of Costs Alone.
It’s almost always a better decision to find a financing option instead of delaying payroll or turning down business. New business owners often base their decisions whether to take financing on the short term costs. Experienced owners however, know that the hit to morale from delaying payroll, or the lost revenue from declining to do business with a client, are more costly to their business than the short-term costs of financing.
In Thirumalai’s case, securing funding before he had an immediate need gave him the ability to seize new opportunities to grow his business. Thirumalai considers winning that large client he would have otherwise been forced to let slip by as the proudest moment for his business in the last six months.
3. Be Aware of Your Options.
Seasoned business owners like Thirumalai know that a single quarter of poor cash flow can spell disaster for a small business. Their solution is to find financing options before a crisis hits. Understanding your options is the first step, but a recent survey conducted by my company, BlueVine, revealed that 40% of small business owners said they couldn’t explain any of the small-business financing options available to them.
Below are three financing options for managing your cash flow and growing your business:
- Provide a vendor discount. Many businesses offer clients a discount for paying invoices before the due date. Giving a 2 percent discount for invoices paid within 10 days is common practice and will incentivize clients pay their invoices ahead of time, helping to free locked-up cash. One disadvantage is that you still won’t be fully in control of your cash flow — your customers will be.
- Checkout a business line of credit. A business line of credit lets you draw funds as needed, so you always have a ready source of cash to tap into when there is an expansion opportunity or a dip in cash flow.
- Utilize invoice factoring. Invoice factoring companies offer financing tied to business invoices. The result is a credit line, like a business line of credit, except that because it is tied to specific invoices, you usually get better rates.
The Takeaway: Plan Ahead.
Learning from his years of experience in business, Thirumalai knew that a cash-flow crunch is disruptive and possibly destructive for his business. By preparing ahead of type for cash flow troubles, owners are better equipped to overcome the hurdles facing their business.
By securing a ready source of working capital ahead of his need, Thirumalai grew his business and avoided the crunch that many businesses face following cash-flow issues. Be proactive, consider the net return, research your options and negotiate from a place of strength, so you can avoid a common source of grief for many first-time business owners.
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from Fundera Ledger https://www.fundera.com/blog/2016/10/07/tips-for-managing-cash-flow