Going with the Flow: Cash Flow and Your Small Business

It’s no secret that small or privately-owned businesses are the backbone of the American economy: 43.5% of the US gross national product is generated by small businesses. It’s also no secret that launching and running a successful small business is a tough challenge: nearly half of small businesses fail during their first 5 years of operation, and only 25% make it to 15 years or more.

According to the US Chamber of Commerce, the leading cause of failure among small businesses is cash flow problems. To be more precise, 82% of small business failures can be traced to problems with cash flow. Of course, cash flow problems can stem from a lot of different sources: insufficient funding, inventory imbalances, problems with accounts receivable or accounts payable, and other causes.

What can small business owners do to maintain healthy cash flow while continuing to build the business? Actually, there are several things you can do to maintain a positive cash flow while re-investing to grow your enterprise.

Know your cycle.

The saying, “cash is king” is nowhere truer than in the day-to-day operation of a small business. As the owner, the first and most important thing you need to know is your business’s cash flow cycle—the time it takes to obtain inventory, pay for it, sell it, and collect payment. For service businesses, the cycle is defined by how long is needed to provide the service and then get paid. Many businesses operate on a monthly cycle, but for some it could be quarterly, and for others (like restaurants) it could be weekly. The point is, you need to understand the rhythm of your particular business well enough that you know, from day to day, where you are in the cycle, and especially if the cycle is off-kilter in some way. When that happens, it’s up to you to figure out the cause and make the adjustments needed to keep your cash—the lifeblood of your business—flowing smoothly and efficiently. Increasing the efficiencies of throughput (selling inventory or providing services), and better matching the times of outflow and inflows of cash are primary to this cycle management.

Keep close tabs on your receivables.

In 2022, 20% of invoices were paid at least two weeks late, according to invoice software company Genio. In fact, 33% were more than a month late, and another 20% were 60 days or more past due. Worldwide, late payments cost small businesses trillions of dollars annually. Meanwhile, their expenses keep coming due with annoying regularity. The lag between the “income” and the “outgo” can create serious problems for any business. The best thing you can do, as a business owner, is keep a constant eye on what you’re owed by your customers or clients and, when necessary, take steps to encourage prompt payment. While tracking and pursuing payment on customer invoices can be a significant time-sink, it’s also true that businesses that systematically follow up on past-due invoices have the best chance of getting paid, if not by the due date, within a few days of it. The quicker a call or contact is made for a delinquent receivable payment, the faster it will be ultimately received. This is a process to be developed, and executed relentlessly.

Manage inventory strategically.

The two biggest expenses for most businesses are payroll and inventory. And, while inventory is technically an asset, most business don’t have the luxury of operating on a barter system: you probably can’t pay your suppliers with inventory, and your employees certainly can’t use it to cover their living expenses. That means that converting your inventory into cash efficiently is a must, as is not allowing your inventory to soak up an unhealthy amount of your balance sheet. The best way to avoid this is to have an accurate knowledge of the cyclical nature of demand for your inventory and to optimize your inventory accordingly. This will likely involve forecasting as well as keeping a close watch on trends within your industry and your particular market. The more frequently you can turn your inventory, the healthier your cash flow.

Work with your suppliers.

Just as you expect to be paid promptly, your suppliers are depending on you to do the same. But to squeeze the biggest advantage possible from your cash flow, try to maintain relationships with key vendors that allow for flexibility when you need it, and one that is related to your terms of selling your product and / or service. Schedule payments according to due dates, rather than paying everything all at once (and potentially creating a temporary kink in the cash flow circulatory system). If there’s a volume discount available and having the extra inventory on hand makes sense, take advantage. Also, a hint on procedure: To keep honest people honest, you should divide the responsibility for purchasing and payment, or at least have multiple signoffs on expenses. Having more than one set of eyes on crucial transactions allows for the checks and balances that help assure accuracy. Another important element is to assure that an “operating line of credit” borrowing facility is available with your banking partner(s).

These are just a few of the ways for small business owners to keep their cash flow steady, and you can get more ideas by viewing “Tips for Small Businesses to Master Cash Flow Management,” offered by the US Chamber of Commerce. At JFS Wealth Advisors, we know how important it is for small business owners and other entrepreneurs to be well-informed on all aspects of business operations and strategy. To learn more about our business growth and transitions services, visit our website.

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