Like many young business owners, I believed in my product and how we could serve customers, but I knew very little about cash flow management. Filling in my knowledge gaps was crucial to my company’s success. According to The U.S. Small Business Administration, three out of 10 new businesses fail within two years, largely due to financial mismanagement. No matter how great a product you have or how loyal your customers are, poor cash management can sink your company fast.
The good news is that any business owner can learn the keys to money management, whether you have an MBA or you’re starting from scratch.
Everything Starts With Cash
Everybody knows you need capital to start a company, but knowing what to do with that money is equally important. Being able to keep money flowing even when business is slow can be the difference between success and failure.
Here are a few ways to put your cash to good use:
- Build your team. The management team is the heart of your organization. Having the cash to entice the best people to come work for your company goes a long way toward ensuring your success. Your team should include a good accountant who can help you stay on top of your financials.
- Invest in infrastructure and relationships. As your business grows, so will your inventory needs. To ensure you can meet customer demand for your products, build strong relationships with vendors and banks from the beginning by paying your bills on time and establishing good rapport.
- Establish a line of credit. This is a long-term strategy for keeping things moving, even during lean quarters. You should apply for a line of credit when you’re flush with cash because it can take several months to complete the process, and you want those funds readily available when you need them.
But resist the urge to take advantage of every credit offer. Limiting the number of corporate cards flying around decreases the risk of abuse and makes it easier to account for spending.
What to Do When You’re Strapped for Cash
Smart business owners always intend to pay their bills on time, but every business falls on hard times at some point. The pressure can be overwhelming—especially when you have employees and their families depending on you—and many business owners make the mistake of taking on high-interest loans that ultimately hurt the business.
Fortunately, there are a few strategies you can use to keep cash flowing in the interim (no bank job required).
- Cut unnecessary sources of spending. Cash flow problems often indicate that you’re spending more than you’re bringing in. Keep a tight schedule on accounts payable and receivable to make sure you don’t run into any tight spots, and look for areas where you can cut your spending. Monthly subscriptions are a good place to start. Those $10 software subscriptions add up month after month.
- Get creative with customers. Let’s say customers pay for your service on a monthly basis. Try offering a one-month discount if they pay a year in advance, or give them free shipping on a product if they pay up front. These incentives generate immediate income when you’re in need of funds.
What’s your best money management trick for healthy cash flow?
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