Small businesses may be the backbone of the American economy, but that doesn’t mean they all stay afloat. In fact, there are approximately the same number of small businesses closing their doors each year as there are new businesses starting up.
The problem isn’t always a failure to build a solid client base to stay running successfully. In fact, the problem is that many small businesses experience cash flow problems; it’s the number-one reason small businesses end up closing down.
The unfortunate part is that, as the business owner, cash flow isn’t always entirely under your control. For example, if you work with larger, corporate clients, they may insist on working on a 60- or even 90-day turnaround for fulfilling invoices. For small businesses that run on a tight budget, that can present an issue.
Luckily, once you understand where your cash flow problems are coming from, you can take measured steps to fix them. Outlined below are some actionable tips to help you increase your cash flow and keep your business afloat.
1. Go through your expenses with a fine-tooth comb.
Even if your profits are high, your profit margins could still be quite low. It all depends on how much money you spend in relation to how much money you make.
Simply put, you could be spending too much. So ask yourself, what are your current overhead expenses? How much are you spending each month on IT, equipment, your office space, etc.?
More likely than not, there is at least one spending area where you can cut back. Start getting in the habit of regularly reviewing your business budget and minimizing costs wherever possible.
2. Send invoices out promptly.
The quicker you send out an invoice, the quicker you can see a payment hit your account. If possible, try to send invoices on the same day(s) each month — perhaps the 1st and the 15th.
This way, clients form consistent expectations for when they’ll likely receive an invoice from you and can plan accordingly.
Consider also negotiating a line in your contract that states you will collect a late fee for invoices not filled after a certain number of days. Your clients are more likely to fill an invoice promptly if they know they need to avoid an additional fee.
3. Stash up an emergency fund.
A preventative measure you can take to avoid cash flow issues in the future is to have an emergency fund saved up for your business. An emergency fund is one of the basic tenets of personal finance, but it can certainly come in handy in business, too. It is money that is saved up for the specific purpose of an emergency situation and you can’t pay your bills — if you have a medical emergency, for example, or any other stressful situation that affects your finances.
Financial experts typically advise people to have 3-6 months’ worth of expenses saved up in an emergency fund, but that can be a difficult amount for small business owners to reach. Even just having one month’s worth of business expenses saved up is better than nothing.
Start small and add to the fund as your business continues to bring in profit. You’ll be thankful for the peace of mind down the road.
4. Keep spending low even in more profitable months.
Many business owners fall into the trap of increasing spending when they have more wiggle room. They’ve had a great month, so they’re using that extra cash to purchase more equipment, up their marketing budget, or even add a luxury to the office.
The problem is that next month’s profitability is not a guarantee. You could experience another lean month in the near future, and find yourself wishing you’d put that frivolously-spent money into your emergency fund.
It certainly does cost money to make money, but carefully weigh each of your business purchases as they come. If the benefits outweigh the initial cost — i.e., you can estimate that whatever you’re spending on will end up earning you money in the long-term — then sure, buy it. But before you hit “Purchase” on that office bean bag chair sitting in your virtual shopping cart, maybe take a step back and think it over.
5. Meet with your accountant.
Even if you’ve worked your business budget down to its bare bones and are experiencing good profit margins, paying taxes can feel like a huge financial burden on your business. Luckily, your accountant can help.
There’s a good chance you could be paying too much in taxes, simply because you aren’t taking advantage of enough itemized deductions and tax credits. Talk to your accountant to see which deductions and credits you’re currently missing out on.
If you’re experiencing cash flow issues as a small business owner, know that you’re in good company and there are always ways to improve your cash flow. This is a common problem, but, if you’re objective about scaling back your expenses and following the other steps above, your business will be in better financial shape in no time.
This is a guest post from Emily Kate Pope, the Managing Editor at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. She specializes in all things small business finance, from lending to accounting.
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