Cash Management Strategies For Small Businesses

For many small businesses, operating under ordinary conditions is hard enough when it comes to maintaining cash flow, especially for small businesses.  However, when you toss in a pandemic on top of the usual obstacles that appear, the situation may feel overwhelming.  Yet, despite the vast majority of small businesses in the U.S. taking a severe hit in recent months, the good news is that there are several cash management strategies out there that can be very effective even under the most difficult circumstances.  If cash flow is currently one of your biggest concerns, here are some strategies you may want to try.

Forecast Cash Flow

As you know, a successful business is one where you as the business owner are able to plan ahead regarding your finances.  While it may seem as if it is impossible to predict cash flow for your business, that is not the case at all.  In fact, it's much easier than you may think.  By using various types of business data software such as Excel, you can take existing data from your business and quite accurately predict your upcoming cash flow.  By using records that can span only one year, you’ll be able to compare the cash you currently have on hand and money currently owed to you against money that needs to be paid out over the same period of time. 

Shorten Your Sales Cycle

The sales cycle for your business, which consists of the time it takes a customer to discover your business, purchase your products or services, and pay you what they owe, may be much longer than you realize.  If it is, this could be a major contributor to your cash flow problems.  To rectify this problem and keep cash consistently flowing through your business, you may need to shorten your sales cycle.  To do so, there are a few steps you can take.  First, make sure your sales and marketing methods are reaching your target audience.  Second, concentrate mostly on "hot" leads that are more likely to pay off in sales.  Finally, automate as many tasks as possible within your business.  Once you do, your sales team will be able to spend virtually all its time prospecting leads and converting them into sales, resulting in increased cash flow for your business.

Learn About Working Capital

Perhaps more than anything, having an in-depth understanding of the working capital for your business will help you to develop an effective cash management strategy.  Working capital, which is arrived at by subtracting your current liabilities from your current assets, is the best indicator of just how big a cash flow problem your business currently has on its hands.  While in a perfect world your business would be able to deliver a product or service and get paid immediately or the next day, the real business world does not work this way.  Instead, you need to retain money to cover various expenses.  As for how you can improve working capital, you can start by reviewing invoices and their terms.  Once you do, it may benefit your business to shorten payment windows or increase the penalties for late payments.  Along with this, you should also try to pay your invoices on time, which may allow you to ask for discounts.  Last, monitor your working capital on a regular basis so that you can spot potential problems ahead of time.

Ask for Deposits

If your business is one where its products or services cost substantial amounts, it may be good if you start requiring customers to put down a deposit upon making their purchase.  By doing so, you can at least keep some money flowing through your business while you wait on the remainder of the payment from your customer.  Though some small business owners hesitate at making this change, those who do often find it can be a quick and easy way to solve cash flow problems.

Delay Various Expenses

If cash management issues continue month after month, you may be incurring too many expenses that could be put off or spread out over the course of several months or even longer.  For example, you may think about exhausting your current inventory before purchasing new inventory.  In addition, depending on your company's workload and how much you are paying out in salaries, it may benefit you to hire part-time or even independent contractors rather than keep full-time employees on the payroll.

Increase Your Margins

Even though times may be tough for you and even your customers, it may be time to solve your cash management issues by increasing your margins.  To do this, you have two options.  If you want, you can try to decrease what it costs you to deliver your products or services to your customers.  However, since this may not be feasible, your other option is to raise the prices of your products or services.  Though this may sound risky, if you have a product or service that is in high-demand and has a solid customer base, you may be able to use this cash management strategy to your advantage.

Though cash management problems are always common for many small businesses, this doesn't mean they have to be a recurring problem month after month.  Whether you shorten your sales cycle or try raising prices for your products or services, you are sure to eventually come upon a cash management strategy that works best for your business and your customers.