Why Cash Flow Matters to Your Business and How to Maximize it
“Cash is king” is an age-old saying that is still around and very true when it comes to both the success and the failure of businesses. Most people start a small business and focus on becoming profitable as fast as possible. It’s just how things are and there is nothing wrong with that, we all do it.
But strange as it may seem, profit isn’t everything. A business doesn’t fail because it is unprofitable. Companies can run for years without turning a dime in profit.
Take Uber as an example. It loses over a billion dollars every quarter, yet nobody seriously considers that it might fail anytime soon.
Look at Blackberry, the company that virtually invented the smartphone. In its heyday, it had a monopoly in smartphones and generated vast quantities of cash. For sure, there have been pressures to spend that money acquiring other businesses or build a personal computer to take on Microsoft. Nevertheless, they didn’t, they preserved their cash. So then, when Apple and Samsung launched consumer-based smartphones, Blackberry’s market dominance vanished. That was 2013, and Blackberry has lost money ever since. Yet, it is still in business today.
Why do businesses fail?
Businesses don’t fail because they provide poor customer service or deliver unreliable products. These factors can contribute to the collapse, but they aren’t the final nail in their coffins. Companies can totter along with all kinds of problems, except one: The lack of money.
As simple as it may sound but money is crucial.
Take Uber. Uber doesn’t fail because it has money from investors. The financial markets believe in their future and keep buying shares. Blackberry keeps going because of the money it retains from a storied past.
It will be the same in your business. You can keep going as long as your business has cash. This can be from shareholders, borrowed money, or better still – from cash generated by your business. A good practice is to pay as much or more attention to your cash-flow as you do to profitability.
How to maximize your cash-flow?
We’ve put together a list of strategies to help you manage and maximize cash flow:
Pay bills as late as you can
Just about every invoice you will receive will contain Terms, probably saying that they will charge interest at some rate after, say 30 days. In this case, keep the money for 29 days and pay it on the last day. Keep the money in your pocket as long as you can. Even if you take it beyond the 30-day deadline, most companies will accept your payment if you only pay them the face value and ignore the interest charges.
Get paid as soon as you can
You will not get paid before your client receives the invoice. It’s in your best interest to issue the invoice as soon as you can. Also, don’t put 30 days in your payment terms. Clients will readily accept 14 days or even less than that. Remind them of the payment only after the deadline has passed. In that case, it’s best to send a client a statement showing the amount owed immediately after the 14 days has expired.
Rent, don’t buy
Preserve your starting capital as long as you can by renting or leasing major cost items. That way, the monthly rental more closely matches income from sales. Rent premises for your business, or work from home as long as you can. Don’t purchase or sign a long-term lease because it is hard to predict how successful you might become. If things go wrong, you will be left with an expensive mistake for years.
Borrow money before you need it
Most businesses are seasonal or operate to their own individual cycles. From experience, most clients pretty well shut down their payables function in the middle of December and don’t start sending checks until halfway through January. Similarly, summer can be an arid period for receiving payments due to holidays in their client accounting functions.
But meanwhile, you still need to keep employees (and yourself) in funds, the rent paid, and the lights on.
Early on, you should negotiate a line of credit from your bank to tide the business over the dry spells. Banks are extremely risk-averse. There’s an insider joke, from the financial world that banks will only loan money to those who can prove they don’t really need it.
Another advice would be to apply for your line of credit, mortgage, or whatever when times are good. Do not wait until you need cash from a bank to meet a short-term crisis, like making payroll or paying taxes. It is humiliating, and they may make you pay a steep price for the loan.
Pay close attention to your cash position. It is vital. Pay bills as late as you can, send invoices out as early as possible, then press early for payment. Establish a line of credit before you need it.