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Managing Small Business Cash Flow – Answers to 10 Commonly Asked Questions

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Managing Small Business Cash Flow – Answers to 10 Commonly Asked Questions

By Caron_Beesley, Contributor
Published: April 15, 2013 Updated: April 15, 2013

Cash flow is the lifeblood of a business and critical in its growth. Small businesses are hugely dependent on their cash flow, and must either cut costs or scramble to find alternative funding when they are not being paid on time. With money tight and bank loans hard to get, a cash-strapped company can easily be pushed to the brink.

But what are the basics of good cash flow management? Are there any cash flow templates you can leverage? Where does your breakeven analysis fit in? And, what strategies can you use to ensure cash is flowing, whether you are in the startup stage or looking to grow an established business?

To find answers to these questions, I checked out an archived SBA Web Chat on – Cash Flow Management – hosted by Julie Brander a business consultant and mentor with SCORE.

Here are Julie’s answers to a series of cash flow questions posed by individual small business owners (but which are universal to us all):

Q: Would you recommend that a start-up venture in the early stages do a cash flow chart and why?

A: A cash flow is the single most important aspect of your business because it focuses on the actual cash that goes in and out of your company. Make a list of all the startup costs or one-time expenses, your monthly fixed and variable expenses, and project your sales to see if this business is feasible. Without knowing your costs and expenses, you will not be able to project your income needed to make a profit in your business.

Q: I struggle just coming up with a template to use to project out my cash flows. I use Excel, but don't use it well. I can look at last months and know where cash went, but I want to look out to the future...one week, one month, one year. Do any tools or templates work better than others?

A: Take a look at this Cash Flow Template from SCORE for a 12-month cash flow. There are other resources online; some are free and some are not. Look into accounting software for this feature as well.

(For more specifics on what to include and why, read: Projecting your Business Cash Flow, Made Simple)

Q: If you are unable to secure credit and credit has been cut or credit lines have been closed, how do you keep the doors open to your business?

A: You will need to sell the inventory that you have and pay cash for all inventory and services that you need until you can build up your credit again. Managing your money with your cash flow chart will help so that you are aware of all expenses. Cutting expenses and increasing sales is always the goal.

Q: How important is it for start-ups to calculate their break-even point and what is the easiest way for a non-financial person to do it?

A: Create a simple spreadsheet that lists all the income from sales each day, week, month and year and all the expenses that the company has to pay out. (SBA.gov has more information on this topic here: Breakeven Analysis.) There are templates online that you can use; for example, SCORE offers a free Breakeven Chart that you can use.

Q: I have a hard time getting clients to pay on time. If they don’t pay on time, I have a hard time meeting our expenses. Any suggestions on how to get paid quicker?

A: You can offer a discount for COD (cash on delivery) or net 10 days; it could be 2% off for paying more quickly. Otherwise, the only way to get paid quicker is to call weekly and remind your customer that money is due and offer to take a charge card over the phone. (For more tips, check out these blogs: Tips for Collecting from Non-Paying Clients and How to Get Paid Faster With a Better Invoicing Process.

Q: I am in the process of opening a coffee shop. How much inventory should I purchase for startup so that I do not overbuy?

A: With your financial projections, you can guess about how much you will be selling. Buy as little as possible to start—but make sure that you can get a quick delivery, as you never ever want to run out of anything. This is something that you will learn as you are in business.

Q: Is there a set percentage to mark up the prices for merchandise? Also, if I can get a discount from a vendor for purchasing a higher volume, do I sell it at a discount or should I sell it at the price I had before the discount?

A: A mark-up can vary depending on your overhead costs. Higher overhead would require a higher mark-up. Always sell your merchandise for as much as the market will bear. If there is a higher perceived value, people will pay more. The discount from the vendor means more profit in your pocket.

Q: What options do micro businesses (mom & pop) size have in obtaining periodic help needed with small loans to help with cash flow?

A: A line of credit is the easiest way to have money available as needed. You would have a limit and use it as needed and pay only for what you use. If you are not able to get a line of credit, you need to make sure that your sales increase to create cash flow. Give your customers incentives to buy more or offer discounts.

Q: At what point should you consider using a collection agency to help you collect on past due receivables?

A: Collection agencies take 30%, so try to collect on your own by calling and offering credit terms or returns or credit card payment. If the company does not have the money, you will not be getting paid so your only hope is to take back the merchandise if you can.

Q: What is the formula to determine how much cash reserves a business should hold?

A: Always have enough cash reserves to cover your slow months in business. You should be safe if you can have 3-6 months or more to cover all unknown or variable expenses that may come up. Always consider increasing your sales and moving your inventory as quickly as you can.

More Information and Learning Opportunities

For a full transcript of the web chat and answers to other questions about cash flow management, check out the complete chat session on SBA’s Learning Center.

Follow SBA on Twitter, Facebook and sign-up for weekly email updates to learn more about upcoming web chats and other learning opportunities.

About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

Managing business cash flow has been made easy with the use of the accounting software's like QuickBooks. This also has the feature of keeping track of the customers in and out and the investment in a very simple way.
Thanks for the great advice! Indeed it is the best stuff that everyone can bear in mind. The frequent questions being asked will absolutely lessen the crap of managing a small business at hand. May it be in printing or some other stuff.
This is truly an insightful and timely article for all business owners and budding entrepreneurs. As mentioned, cash flow is really the life blood of the business. One avenue that businesses are opting to consider is leasing equipment for their operations. Capital fixtures can really put a dent in one's pocket but exploring the leasing or financing solution can have its huge long term benefit.
We always used Quickbooks Pro for creating cash flow scenarios. Living in a tourist town, many business owners have to hold on to their money they make, from May-Sept, to have cash flow over the summer months. The ones that don't do it correctly, either borrow more or go out of business.
But what are the basics of good cash flow management? Are there any cash flow templates you can leverage? Where does your breakeven analysis fit in? And, what strategies can you use to ensure cash is flowing, whether you are in the startup stage or looking to grow an established business
Another resource for businesses is to use a 13 week cash flow projection, that can be a lot less daunting for businesses than a 12-month projection. It is also important to note that even if you have had credit lines closed or are otherwise unable to secure traditional bank lending, you can look at many alternative forms of business credit. These range from leasing and equipment financing, to merchant cash advances, as well as accounts receivable financing.
Managing the finances of a small business is a multi-layered task. You need to become familiar with standard financial documents, pay attention to profits, and make the most of the business’s assets. And you always have to be thinking and planning ahead. You have some work to do, get to it! Please note that Community members are not permitted to advertise their business. Please review our Community Best Practices (http://www.sba.gov/community) for more information about how best to participate in our online discussions. Thank you.
Hello Caron, Once again you have great advice!! We were looking into adding an additional service to our company but after careful consideration we determined it would not be lucrative for our small business. By actually using many of the questions you suggested. As a small business we have to keep a close eye on our cash flow and make sure every decision will definitely benefit the company and keep the cash flow in check. Thanks again for the advice and useful information.

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