Follow the Money

Whether it’s a startup or a large, established company, cash is vital to the daily operations of every business. Without a clear and detailed picture of how cash flow affects them, business owners can find themselves struggling to keep up.

Business consultant Julie Brander knows the importance of managing cash flow firsthand. Over nearly 20 years, she and her partners grew a small jewelry wholesaler into a manufacturer that sold through multiple channels, including major retailers. Since selling her stake in the company, she’s also taught entrepreneurship, and shared her expertise with business owners as a SCORE Association mentor. Here, she shares advice for business owners tackling cash-flow challenges. 

Know Your Market

Fundamental to any consideration of a business’s cash flow is an understanding of its customers and competitors. “All small-business owners need to understand who their customers are, where they are, what they want, and what they will pay,” says Brander. 

Knowing your customers is just the beginning—you also have to know who else is vying for their business. “Study and evaluate the competition. What do they do better, and what are their weaknesses?” says Brander. Customers will choose the company that responds most quickly and exceeds expectations. 

Knowing the market will make it easier to set pricing. Brander’s advice? “Price it high enough for a minimum profit of 20 to 40 percent, depending on the industry. The markup can be determined by the industry standard or by perceived value.” Working with an accountant who specializes in small businesses—ideally an expert in your specific industry—can be invaluable when determining pricing.

Bankers are another resource as companies work on their business forecasting and cash flow plans. 

“Price your products high enough to make a profit yet still maintain a competitive advantage,” says Brander. She points out that prices are easy to lower, but hard to raise.

Chart Your Current Cash Flow

Getting a handle on your business’s overall finances means understanding your cash flow—all the money that comes into and goes out of your business. The more you know about how money moves through your business, the easier it will be to organize now, and plan for the future.

New business owners should “make a list of all the startup costs or one-time expenses, your monthly fixed and variable expenses, and project your sales,” Brander suggests. “Without knowing your costs and expenses, you will not be able to project the income needed to make a profit in your business.”

Fixed expenses are predictable, including routine costs like rent, insurance, and phone bills. Variable expenses can be harder to predict—equipment servicing, for example, or hiring costs. Remember, expenses aren’t always obvious. For example, according to Brander, service businesses may overlook the costs of travel time, gas, and vehicle overhead. Have your accountant help identify every cost that may be affecting your bottom line.

According to the U.S. Small Business Administration, a typical cash-flow analysis should consider three major categories of cash inflow and outflow. Operating activities comprise the business’s net from sales and expenses. Investment activities include the purchase and sale of significant investments, such as real estate or equipment. Financing activities encompass the income from, and repayment of, loans.

Once you know where your business stands financially today, you can use that data to help foresee longer-term trends and set benchmarks for future growth.

Prepare for Unexpected Events

Regardless of how carefully a business owner plans, unexpected circumstances are almost certain to arise. In those cases, businesses may have to rely on their cash reserves. 

Brander suggests keeping enough cash on hand to weather three to six months—or more—of unexpected or volatile circumstances. This is especially important for businesses that vary seasonally; if a company’s sales depend on the holiday season, for instance, it needs enough reserves to maintain itself during the slower months as well.

Bankers will also recommend that business owners evaluate debt and the balance between reserves and borrowing. Many companies are afraid of debt, but a disciplined, planned approach to borrowing can be beneficial as owners seek to grow and also act as a cushion during periods of downturns or unexpected expenses.

Address Cash Flow Issues

Since cash flow problems are a common pitfall for businesses, Brander cautions owners, “Be aware of too many receivables, too much inventory, and high overhead costs.”

When it comes to taking better control of cash flow, every little bit helps. “Ask for credit terms, buy on sale, buy used, buy closeouts,” Brander advises small-business owners. “Negotiate everything, get inventory on consignment, negotiate your return policy to rotate inventory and reduce overhead costs.” Buying supplies with other companies or a trade association may save money through a volume discount, and careful use of bartering can be helpful, as well.

Brander also suggests that business owners incentivize employees. Payroll can be as high as 40 percent of overhead, so to motivate and get the most out of employees, offer incentives for sales—an award for the top salesperson of the month, for instance. If timely payments are a problem, offering incentives to customers for early payment can also be effective. For example, she suggests a 2 percent discount for payments of net-10 days or cash-on-delivery.

Watch for warning signs that your cash flow may be in trouble—like not having enough money to pay bills. If negative cash flow becomes an issue, expenses must be cut wherever possible. 

Business owners should consult with their lenders and accountants as they confront cash flow issues. However, “Only get a loan knowing that you will have the sales or income to pay it back,” Brander advises. She also cautions business owners not to use a credit card for these circumstances—its interest rate is their profit margin.

Since cash flow issues can be complicated, especially for newer business owners, the Small Business Administration suggests working with a business accountant, a reputable lender or contacting your local SCORE office for expert advice.