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Cash flow issues are an unfortunate but all too common reality for entrepreneurs and small and medium-sized businesses (SMBs). This is especially evident in times of uncertainty and rapid change.of For example, the war between Russia and Ukraine has resulted in rising fuel costs, government sanctions, and Disruption in global supply chains.
Cash flow problems can have many causes, but the end result is always the same. This means there is not enough liquidity available to cover day-to-day operating costs, such as paying suppliers and meeting payroll obligations. Failure to meet these basic operational needs impacts the ability of a business to achieve or sustain profitability, which itself often has cascading effects.
However, it is important to recognize that cash flow problems are inevitable. And when they do occur, they are not always insurmountable. That said, here are some possible solutions for SMB owners to address (or avoid altogether) cash flow issues.
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1. Simplify billing and billing processes
According to a YouGov survey, 55% of US SMBs I am currently waiting for the money tied up on the late invoice. SMB is Twenty-five percent of US small businesses are paid on average 20 days or more late.
One of the best ways to minimize cash flow problems is to allow your clients and customers to make payments quickly. There is no silver bullet here. Each company has to find the best solution for them.
One of the most effective ways is to overhaul your payment system to make it easier for your clients and customers to make timely payments. This might mean adding a one-click payment link to your invoice or allowing another payment option (direct debit, installment payments, recurring payments, etc.).
Another effective way is to update your payment terms to include incentives for early payments and penalties for late payments. For example, you can offer a 2% discount on invoices paid within 5 days and charge 2% interest for each month the invoice is paid late.
These two approaches encourage customers and clients to prioritize timely payments that support healthy cash flow.
2. Create a cash flow forecast
A cash flow forecast is a document (usually run for 12 months) that estimates monthly inflows and outflows. SMBs are essential for any SMB because they can identify potential cash flow problems before big problems arise, identify the best times to make large purchases and investments, and assess the impact of changes in income and expenses. It’s a tool.
Creating a cash flow forecast is relatively easy. Get started with purpose-built accounting tools preloaded with reports and features for cash flow management and forecasting. This automates the process and makes it easier for businesses to understand cash flow.
Alternatively, you can create the forecast manually in Excel or Google Sheets. All you need is a clear overview of your expected and actual income, expenses, assets, and liabilities.
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3. Build up your cash reserve
In personal finance, the concept of an emergency fund is relatively common knowledge. Building a cash reserve for your business works much the same way. By setting aside funds in a separate interest-bearing account, SMBs can ensure they always have access to the funds they need to cover their costs and avoid the need to close their business.
The size of your emergency fund depends on factors such as the nature of your business and your location. As a general guideline, we recommend setting aside about 2-6 months of basic operating costs.
Building a cash reserve can be difficult, but it’s worth persevering. This is one of the best ways to protect against business closures and other serious problems associated with poor cash flow management.
4. Negotiations with creditors
According to the latest available data, 73% of US-based SMBs Whether it is a bank, a supplier, or a creditor, you owe a debt.
When cash flow slows, it may be time to negotiate the terms of an existing contract. This can be difficult as SMBs may not have as much bargaining power as larger companies. That said, some suppliers are happy to sign contracts. Especially if you are honest and flexible about the situation.
You may be able to pay off your debts with smaller (but more frequent) payments, negotiate lower interest rates, barter for goods and services, or negotiate payment terms for large orders.
Similarly, if you are expecting an invoice but are unable to pay the full amount, you may be able to strike an agreement with your creditor. You can make periodic payments until the debt is cleared. As always, communication and honesty are key!
Cash flow management is an important part of running an SMB, and being proactive always pays off. By following the steps above, you can manage your cash flow and prevent strikes. Additionally, as with any critical business process, it’s worth seeking expert advice and using specialized tools to streamline the process. This makes it easier to track cash flow and spot potential problems before they become big problems for your business.
