Think your growing small business already has a handle on cash flow?
Think again.
To be sure, businesses as small as the tiniest mom and pop store to as large as GE struggle with cash flow. But growth-stage businesses need to know this: Cash flow problems can impede your growth.
Raju Mohandas sees it all the time with the clients he advises for Florida SBDC at FIU, a small business development center within the FIU College of Business. Growth becomes a major factor in cash crunches because many companies have not analyzed how they will finance their growth, based on their cash flow. Growth is a major factor in cash crunches, he said, and it goes beyond funding that new employee or purchasing some new machinery.
Fortunately, there are levers you can use to increase cash flow, the difference between income flowing in and out of your business at a specified time period.
Mohandas, who specializes in business finance, lending and access to capital, advises small businesses to look at their cash-to-cash cycle, or when they put money in and when they get it back. Most of the time, he said, there is a gap. So how will you bridge that gap? Often times they will find that they either need to scale down that growth or seek outside capital to finance the growth.
Here are some strategies for bridging the gap:
- Be more aggressive in accounts receivables. Make the invoicing process as easy as possible, work to reduce your days outstanding for payments and consider discounts for prompt payments.
- For accounts payable, negotiate volume discounts and better terms from suppliers. For example, instead of 30 days for payment due, try to get 60 days.
- Look at your slower moving inventory for ways to move product more quickly, such as pricing or volume discounts.
- Pay attention to your expense columns. Can anything be delayed or restructured, without affecting the company’s credit?
- Is there new technology you can implement to make the processes more efficient and save money, too?
If all that is still not enough, then you might look for outside funding, such as a line of credit to bridge this gap, Mohandas said. Many of the businesses he sees go to a line of credit before moving any of these other levers. However, if you have bad habits in your accounts payables or receivables, more money only will amplify those problems.
One client, for instance, is generating more than $5 million but is not immune to cash flow issues. Although the company had a good handle on its accounts receivable, it had been lax on accounts payable. Now it is looking at a gap of nearly a quarter of a million and scrambling for a loan.
It’s not a one-prong attack: you have to attack at multiple fronts, Mohandas said. If you can harvest a little from every front, you have that bridge.
Mohandas suggests businesses spend a couple of hours every week managing their cash flow. It needs to be a daily habit.
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