Five Steps to Rid Your Business of Cash Flow Woes
One of the top priorities of convenience retailers is to keep stock of the most popular selling items. To meet customer needs and run a business, convenience store owners need to regularly monitor cash flow to ensure things are running as efficiently as possible. In these uncertain financial times, reserving cash is one of the most important steps a store owner can take to secure the survival of his or her business.
More than 60 percent of business owners are "very concerned" about having cash available to pay bills over the next six months, according to the American Express OPEN Small Business Monitor, a semiannual survey of business owners.
Many small-business owners tend to gauge the health and success of their business on factors such as profit margins, sales growth or strong customer loyalty. While these are critical metrics, the reality for any business is that a balanced cash flow is an equally important indicator of wellbeing because cash pays the monthly bills, covers the payroll and can be invested back into the business to support expansion.
To avoid the perils of uneven cash flow, small-business owners simply need to keep five basics in mind to measure, monitor and manage the cash that moves in and out of their business.
Know Where You Stand
First, know exactly where you stand with a cash flow statement. A cash flow statement shows the movement of money in and out of a business over a specific period of time.
This statement will show not only what cash is left at the end of the month, but also the amount that entered and left the business. It's important to see this before reserves get low; otherwise, a business with strong sales but lagging receivables can find itself in a bind when it comes to covering unexpected expenses, or if the business encounters slow times.
If tracking cash flow seems daunting, then speak with a savvy advisor, because there's no replacing the knowledge you'll gain from these basic figures and calculations.
Go to the Source
Understanding how cash flow problems occur is your best defense. Cash flow problems can arise from either end of the business cycle -- spending or receiving.
Looking at the spending side of the equation, consider periods of growth. It's necessary to expand to take advantage of good market conditions, but growth expenditures can quickly deplete precious cash reserves.
On the other side of the ledger, there must be a steady flow of money coming into the business, or reserves will quickly run dry. Slow business can erode cash quickly, so be sure to plan for the unexpected. Understanding where cash flow problems originate can help you avoid them before they become an issue.
Keep Cash Flowing
Get serious about minimizing your business' fixed expenses. A company should be big enough to cover only its most predictable, recurring needs. Find creative ways of handling peaks in demand without hiring additional staff. Outsourcing certain jobs or hiring interns are good strategies for minimizing cash needs.
When making purchases for your business, look for non-cash ways to get what you need. Credit card rewards programs and frequent flier points can be effective cash substitutes.
Of course, many expenses must be paid in cash. One way businesses can even out their cash flow is by delaying payment through trade terms with vendors. Try to negotiate terms that allow you to defer payment beyond the typical 30 days and reward you with a discount when paying early.
For the cash coming into your business, make sure what you're owed arrives on time by setting clear payment terms and expectations. In addition, accepting credit cards will help reduce billing and collections costs, so you can receive payment from credit card issuers in as few as three days.
Have a Fallback Plan
Despite the best of plans and most diligent cash management, there may be times when your company needs additional cash, so it's important to have tools on hand for when cash is scarce. One of the reasons it pays to plan ahead is that some financial institutions may be more likely to extend lines of credit or loans to your business when it is in good financial health, and less likely when cash flow problems have already taken a toll on your finances. When seeking financing, be careful not to overlook special lending programs for which your business may qualify.
Once you have credit available to you, use it wisely. Short-term financing options, such as lines of credit, short-term loans or credit cards, are best used for short-term cash needs. Likewise, long-term or secured loans should be used for the purchase of long-term investments.
Manage Growth
Consistent growth is the best way to smooth out bumps in cash flow. When growth opportunities arise, plan carefully with an eye on cash-flow projections.
Every investment, whether in inventory, people or equipment, should have a clear return. Make sure each earns a profit, but also look at how long it will take to collect them. Likewise, if you look at each customer as an investment with a scheduled return, you'll not only improve cash flow, but your profitability too.
Entrepreneurs go into business because they thrive on the excitement of a good challenge, but even the most daring entrepreneur can do without the stomach-churning, rollercoaster ride of variable cash flow. Rid yourself of these avoidable bad times by keeping an eye on your cash flow, and enjoy the real thrills and excitement of owning your own business.
Richard Flynn is senior vice president and general manager for American Express OPEN, a position he assumed in January 2009. In this role, he leads product management for the U.S. card business dedicated to small businesses, and is responsible for overall profit and loss management, product line management, new product development, key partnerships and customer experience.
More than 60 percent of business owners are "very concerned" about having cash available to pay bills over the next six months, according to the American Express OPEN Small Business Monitor, a semiannual survey of business owners.
Many small-business owners tend to gauge the health and success of their business on factors such as profit margins, sales growth or strong customer loyalty. While these are critical metrics, the reality for any business is that a balanced cash flow is an equally important indicator of wellbeing because cash pays the monthly bills, covers the payroll and can be invested back into the business to support expansion.
To avoid the perils of uneven cash flow, small-business owners simply need to keep five basics in mind to measure, monitor and manage the cash that moves in and out of their business.
Know Where You Stand
First, know exactly where you stand with a cash flow statement. A cash flow statement shows the movement of money in and out of a business over a specific period of time.
This statement will show not only what cash is left at the end of the month, but also the amount that entered and left the business. It's important to see this before reserves get low; otherwise, a business with strong sales but lagging receivables can find itself in a bind when it comes to covering unexpected expenses, or if the business encounters slow times.
If tracking cash flow seems daunting, then speak with a savvy advisor, because there's no replacing the knowledge you'll gain from these basic figures and calculations.
Go to the Source
Understanding how cash flow problems occur is your best defense. Cash flow problems can arise from either end of the business cycle -- spending or receiving.
Looking at the spending side of the equation, consider periods of growth. It's necessary to expand to take advantage of good market conditions, but growth expenditures can quickly deplete precious cash reserves.
On the other side of the ledger, there must be a steady flow of money coming into the business, or reserves will quickly run dry. Slow business can erode cash quickly, so be sure to plan for the unexpected. Understanding where cash flow problems originate can help you avoid them before they become an issue.
Keep Cash Flowing
Get serious about minimizing your business' fixed expenses. A company should be big enough to cover only its most predictable, recurring needs. Find creative ways of handling peaks in demand without hiring additional staff. Outsourcing certain jobs or hiring interns are good strategies for minimizing cash needs.
When making purchases for your business, look for non-cash ways to get what you need. Credit card rewards programs and frequent flier points can be effective cash substitutes.
Of course, many expenses must be paid in cash. One way businesses can even out their cash flow is by delaying payment through trade terms with vendors. Try to negotiate terms that allow you to defer payment beyond the typical 30 days and reward you with a discount when paying early.
For the cash coming into your business, make sure what you're owed arrives on time by setting clear payment terms and expectations. In addition, accepting credit cards will help reduce billing and collections costs, so you can receive payment from credit card issuers in as few as three days.
Have a Fallback Plan
Despite the best of plans and most diligent cash management, there may be times when your company needs additional cash, so it's important to have tools on hand for when cash is scarce. One of the reasons it pays to plan ahead is that some financial institutions may be more likely to extend lines of credit or loans to your business when it is in good financial health, and less likely when cash flow problems have already taken a toll on your finances. When seeking financing, be careful not to overlook special lending programs for which your business may qualify.
Once you have credit available to you, use it wisely. Short-term financing options, such as lines of credit, short-term loans or credit cards, are best used for short-term cash needs. Likewise, long-term or secured loans should be used for the purchase of long-term investments.
Manage Growth
Consistent growth is the best way to smooth out bumps in cash flow. When growth opportunities arise, plan carefully with an eye on cash-flow projections.
Every investment, whether in inventory, people or equipment, should have a clear return. Make sure each earns a profit, but also look at how long it will take to collect them. Likewise, if you look at each customer as an investment with a scheduled return, you'll not only improve cash flow, but your profitability too.
Entrepreneurs go into business because they thrive on the excitement of a good challenge, but even the most daring entrepreneur can do without the stomach-churning, rollercoaster ride of variable cash flow. Rid yourself of these avoidable bad times by keeping an eye on your cash flow, and enjoy the real thrills and excitement of owning your own business.
Richard Flynn is senior vice president and general manager for American Express OPEN, a position he assumed in January 2009. In this role, he leads product management for the U.S. card business dedicated to small businesses, and is responsible for overall profit and loss management, product line management, new product development, key partnerships and customer experience.