Finance Operations

Tips for managing cash flow, the lifeblood of your business

What’s the No. 1 reason small businesses fail? Cash flow, not lack of profits. About 80% of  small business failures happen because of poor cash-flow management.

Ray Juncosa, a consultant at Florida SBDC at FIU and a finance specialist, says he hears it all the time from his clients: “They say ‘we recorded a profit last year, we paid taxes, but I don’t have enough money in the bank.’ I tell them you have too much money tied up in inventory or receivables or both.”

Are you profitable but still struggling month to month in managing cash flow? You are not alone. Managing the timing of when money enters and exits  a company is crucial to business survival and growth.

Juncosa, a former banker, continues, “What happens to a lot of these businesses is that they love to sell but they don’t understand their operational cycle. A company can sell its way out of business.”

As an example, he said, business owners get excited when they win a contract with a big-box retailer. But they need to understand there may be terms attached such as you won’t get paid for 90 days – or more. Meanwhile you have to buy the inventory and pay overhead expenses, Juncosa said. “Can you sustain that?  If you can’t and you can’t get a capital infusion, sometimes it is better not to do it.”

What else can you do so your business doesn’t become a statistic? Juncosa’s first and perhaps most important tip: Set aside time in your week to think about strategy and really get to understand you numbers.

“Small businesses are so much into the day to day they don’t think enough about strategy… You have to be always vigilant about looking for ways to improve your cash flow. It’s the lifeblood of your business.”

Juncosa continued, “You need to set aside time to look at your financial situation. Look at that operating cycle. Is this optimal or are their opportunities to negotiate? Look at your payables and receivable for ways to make your operating cycle shorter.”

Here are a few more of Juncosa’s tips:

  • To begin to understand your numbers, make it a daily habit to to know your actual daily cash balance – avoid managing from bank statements. That way, as you recognize potential cash flow problems, create strategies that support ample cash flow.
  • Think of your invoice as a marketing piece, make it as easy as possible for the customer to understand and pay. Consider granting discounts for prompt payment.
  • On the receivables side, make sure that your terms are not too long and that your receivables are quality accounts to keep delinquencies down. Be careful on the payables side, too. Buying inventory that doesn’t move becomes stale, then obsolete.  And this time you want terms on your side – as long as possible to pay and negotiate volume discounts too.
  • To increase cash flow from sales growth, open new shorter, less costly distribution channels, increase prices where competition is least felt, and introduce new technology to help reduce sales costs.
  • Spend and collect with care. Watch overhead costs, always negotiate on price. Give credit very carefully but collect very aggressively.
  • Have a sale for slow moving inventories, and negotiate just-in-time contracts so that you can keep as little inventory on hand as possible.

Want more tips on this most important topic? Watch Juncosa’s recent webinar for Florida SBDC at FIU here.


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