When it comes to running a small business, the maxim “cash is king” rings true. Cash flow is crucial to pay for inventory and keep the lights on.
It turns out that 29% of small businesses fail because they ran out of cash.
What’s scary is that only half of small businesses have a cash buffer large enough to support 27 days of their typical outflows, according to a recent study by JP Morgan Chase.
Bottom line: Small businesses need to stay on top of cash flow from day one.
Here are 6 ways small businesses can manage their cash flow, and in turn, grow their operations:
1. Forecast Your Cash Flow
Your cash flow forecast helps you look ahead to predict your cash flow in the next month, quarter, or year. For instance, when are your peak seasons, and when does your business experience lulls? By looking ahead, you can prevent problems before they occur.
For instance, let’s say you have $5,000 in your business bank account, plus predict $10,000 of cash coming in the next month. If your estimated expenses for the next month is $4,000, your cash flow forecast for following month is $11,000.
2. Make it Easy For Customers to Pay You
Best practices include invoicing promptly, finding out how your clients prefer to pay you (i.e., direct deposit, payment apps, check, credit card).
To make sure you’re set up to receive payments from other businesses promptly, use accounting software to keep track of the status of all your invoices.
3. Diligently Make On-Time Payments
Conversely, you should schedule your payments ahead of time. By staying on top of payments to vendors you will develop solid professional relationships. This not only makes for smoother sailing, but could potentially net more favorable terms in the future.
4. Offer the 2/10 Net 30
Consider offering a 2/10 Net 30 payment option to vendors whom you owe money. When you receive an invoice, ask for a 2 percent discount on the total amount owed if you pay the invoice within 10 days. Otherwise, if the bill is paid in 30 days from the date the invoice is sent—which is the standard— you’ll owe the full amount.
This is a nice incentive that saves your company some money if your cash flow is positive. It’s a win-win situation for both parties.
5. Pay Vendors with Credit Card
By paying vendors with a business credit card, you can get reward points. Those reward points can be redeemed in the form of cashback, which can be put back into your business cash flow. Or, you may use the points toward travel.
Another perk? In the case that your business needs it, a credit card is an another line of financing you can tap in to as necessary. It can also help bolster your business credit, which opens the door for additional lines of credit or loans.
6. Go Digital
Another major challenge is that each vendor, supplier, or contractor has their own preference as to how to get paid. Digital payments can really help small businesses view their cash flow at-a-glance. If all your payments are on a single platform, you can see each month what your outflow will be and act accordingly. For example, schedule a large payment on a certain day.
That’s where Melio comes in. Melio is a simple tool, made for small businesses, to handle all aspects of vendor payments digitally.
Melio syncs the payment process with your accounting software giving your business the ability to see all its spending on one platform and forecast its cash flow with a single view. To learn more about Melio, visit meliopayments.com
*This blog post is intended for informational purposes only and is not intended as financial advice.
**Melio does not provide legal, tax or accounting advice, and you should consult with a professional advisor before making any financial decisions.