You may have heard the phrase “Cash flow is the blood that keeps a business alive.” This couldn’t be truer, as consistent positive cash flow can help a business owner pay expenses, invest in new opportunities or grow a business.
Fortunately, as small-business-owner optimism remains high, most owners expect a healthy cash flow this year. The January 2018 Wells Fargo/Gallup Small Business Index found 77 percent of small-business owners rated their company’s cash flow as very good or somewhat good over the past 12 months, up from 73 percent in November 2017.
To help with managing cash flow, here are five tips you should consider:
1. Spread out your payments
Paying all your business bills at the same time rather than spreading them out can drain your disposable income and leave you at risk of not being able to pay your creditors and suppliers if an unexpected expense occurs.
Instead, try paying your bills closer to the due dates and negotiate with your vendors to see if you can extend your payables to 60 or 90 days.
Also, be sure to pay your most important bills, such as rent and payroll, before paying less important bills.
Check with your vendor to see if you can receive discounts for paying any bills early. Remember to pay all your bills before the due date to maintain a good credit standing.
2. Collect payments quickly
Another way to improve cash flow is to incentivise customers to pay early by offering discounts.
Other techniques for collecting payments quickly include requiring deposits from your customers when taking orders and offering online payment options.
Thanks to advancements in technology, there are multiple ways for your customers to complete quick and efficient transactions with your business. One example is electronic billing, which allows for you to customize invoices and set up automatic payment reminders for customers.
3. Establish a strict credit policy
It’s important to be wise about extending credit as a business. A non-paying customer can be a hefty expense to a small-business owner.
Establish a written set of standards for determining who is eligible for credit, and enforce those standards rigidly.
Also, be sure to require a credit check for all new customers before extending credit and monitor your accounts to identify late payers early so you can offer them a variety of payment options. These options might include a credit card charge or a payment plan.
4. Align your payroll cycle with your revenue stream
Some businesses, such as restaurants and retailers, generate daily revenue and can more easily cover the expense needed for weekly payroll.
For others, such as manufacturers, this could be a challenge, and you may benefit from paying employees less frequently, provided applicable wage laws allow you to do so. Refer to your state Department of Labor for pay frequency information.
5. Plan ahead for cash shortages
Expect the unexpected. Typically cash flow will vary, and unexpected expenses will occur even for established businesses.
Keeping a rainy day fund with three to six months of basic operating expenses in a reserve can prepare you for slow periods and emergencies.
Another option is to use a business credit card or business line of credit to pay for everyday expenses and help bridge gaps in cash flow. Be sure to monitor your expenses with online banking and monthly statements.
Related: How Amazon Is Keeping It Lean
One important tool for planning ahead is a cash flow forecast, usually a one-year prediction of how cash will move in and out of the business. This helps business owners evaluate how profitable future sales will be, and provides an overview of what needs to be done to reach your goals.
In its simplest form, a cash flow forecast should show where cash balances will be at certain points in the future so you can anticipate and prevent cash shortages. To get started, organize your payables and receivables on a spreadsheet to see where money is coming and going.
Ultimately, reaching your highest potential as a business owner and being able to serve your customers effectively depends on maintaining positive cash flow. Following the tips above may help keep your business financially strong and position your company for success.
This article was originally posted here on Entrepreneur.com.
Why Cash Flow Is King But Margin is King Kong
Why you should shift your attention from cash flow to creating — and maintaining — strong margins for long-term growth and success.
Conventional business wisdom states that turnover is vanity, profit is sanity, and cash flow is reality. And while this is true (very true), the focus on cash flow can become a distraction to what, in my opinion, is a more important focus. I see cashflow issues as symptomatic of other, hidden elements of running a business properly. The most important lever of all is the creation of margin (gross profits) in your business.
Here are five pointers to consider.
1. Chasing cash flow can be a distraction
The underlying driver for creating margin is creating defendable, distinguishable value for a client. When you create defendable, distinguishable value, it translates into the ability to charge more for your products and services since, by definition, there are lower competitive forces at play along with a higher perceived value.
Higher margins translate into higher net profits and this, over time, goes a long way towards reducing the effects of bad cash flow management.
2. Create cash flow systems
When analysing the thousands of businesses to which I have been exposed over the last 18 years, I have seen that the majority of those experiencing cash flow problems have weak to non-existent cash flow systems. A few important systems and approaches can make all the difference in managing your cash flow better, and will give you more time to focus on creating defendable, distinguishable value.
These systems include: Budgets (that are used); creditors’ policies (that are implemented); a tough creditors’ clerk (who has no problem hunting down cash); and nurturing strong relationships with clients (in particular, with their accounts departments).
3. Margin increases resilience
Not only does margin create a cushion of cash that can be used to smooth over delinquent payers, but it also allows for a mindset of freedom to provide additional cost-bearing value-add to clients in emergency situations that require it, without any anxiety as to the overall profitability of the deal. This almost always leads to improved client relationships.
4. Margin increases the depth of core competencies
Some of the profitability generated by increased margin should, in my opinion, be channelled into deepening the core competencies of the business.
Deeper core competencies reinforce the company’s defendable, distinguishable value-add which creates more cash — a virtuous cycle. This cycle needs to be jealously maintained and guarded.
5. Margin keeps the client at the centre of attention
When you focus exclusively on cash flow, you are — to all intents and purposes — focusing on yourself. Your energy is concentrated on insuring that you have sufficient funds to maintain the operations of your business. When your priority is margin, your client becomes the centre of your business existence.
Your focus moves to their needs and solving their problems. This ensures longer-term, more profitable and stronger relationships with your clients. The result — given that proper cash flow systems are in place — is a business that does not experience cash flow issues.
The problem with conventional pieces of business wisdom is that they sound plausible and contain just enough truth for you to make them guidelines in your business. Perhaps a deeper analysis of their true wisdom, and whether or not they are masking a cause or effect, will result in you adopting practices that are more valuable to your business in the long run.
The Next 5 Steps To Take After You’ve Been Denied A Small Business Loan
First things first: Ask the lender exactly why you were denied. Then, try, try again.
Let’s say you put together a business plan. You did the math to figure out exactly what you needed. You researched your small business loan options, diligently completed the paperwork and even did your little “good luck” dance as you clicked the “submit” button on your application. But then, your worst fears came true: You were denied that small business loan.
Let’s face it: There’s almost nothing quite as discouraging for an entrepreneur as seeing your business dreams halted by the decision of a single lender. You might feel rejected, have no idea what to do next and even start to question whether your grand business plans were ever meant to come true in the first place. But here’s the good news:
Of the many entrepreneurs who are denied a small business loan after their first application, most do go on successfully obtain financing with later applications. The key is to figure out why your application was denied, take steps to improve your credit and financial standing and choose the right loan product for your business – before trying again.
Don’t let a single denial hold you back from pursuing your small business goals! Here are the five steps you can take right now to ensure that your next business loan application results in a resounding yes.
Related: Is Venture Capital Right For You?
1. Request an explanation from the lender
Once a loan officer has given your application that red stamp of denial, you’re not likely to change his or her mind. Most lenders, however, will be willing to provide a letter of explanation detailing the reasons that your business loan application did not meet their requirements.
Understanding why you’ve been denied a small business loan will be critical as you seek to successfully re-apply in the future – and the answer might not be as obvious as you may think. A letter of explanation from your lender will allow you to address those specific concerns before seeking funding again in the future.
2. Check your business and personal credit reports
If you’ve ever bought a house or a car, or even applied for an apartment lease, you’re likely very familiar with your personal credit score and the impact it can have on your access to financing. But did you know that as a small business owner, that personal credit score also weighs heavily on your access to a small business loan?
That’s why, upon being denied a small business loan, one of your first steps should be to check your personal credit report and score for any discrepancies or forgotten financial woes that may have contributed to the denial.
Be sure to check your credit report with all three major reporting agencies – Experian, Equifax and TransUnion – as different bureaus may receive and report different information about your credit history. Should you find any errors on your credit report, reach out to the agency, in writing, to have the information corrected immediately. You don’t want an error to impact your ability to get a loan.
Along with your personal credit, your business also has its own credit report and score, which factors into lenders’ criteria. For most small businesses, however, the challenge of business-credit reporting most often stems from a lack of credit – particularly if your business is relatively new or you’ve never sought a loan before.
Work to build up your business credit by asking vendors, creditors or even the landlord of your retail property or office space to report your payment history to major business credit reporting services, including Experian, Dun & Bradstreet and Equifax.
3. Take steps to improve your business’s financial standing
While your business and personal credit scores will typically be the most influential factors in a lender’s decision process, the internal financials of your business – particularly the strength of your annual revenue, cash flow and business savings – will also be considered.
Taking an objective look at these factors from your lender’s point of view may help you to determine what steps you can take to either improve your financial standing or choose a loan product that will be a better fit.
The best way to do this? Take a look at what’s called your debt service coverage ratio, or DSCR, for short. This simple formula is the tool that lenders use to determine whether your business has the necessary cash flow to make your loan payments consistently and on time.
Don’t know what a DSCR is? Here’s the basic formula you’ll need to calculate your debt-service coverage ratio, including your anticipated loan as part of your calculations:
Annual net operating income + depreciation and other non-cash charges
Divided by interest + current maturities of long-term debt
A debt service of less than 1 indicates that your business’s debt will exceed available cash flow, meaning your loan will surely be denied. Most lenders look for a higher DSCR – at least 1.25 – with a ratio of 1.5 or even higher being ideal.
Even if you’ve been denied a small business loan because of a low DSCR, you may not be able to quickly increase revenue or reduce expenses in order to re-apply.
If this is the case, consider seeking a lower amount of funding – at least at the start – in order to increase your chance of approval until you can build up your business’s financial standing.
4. Consider alternative loan products
We can’t say this enough: A denial from one lender on one loan application is not a “no” for all time. Variations between lenders’ standards, the requirements different loan products have and the amount and terms of your financing can often mean that even without making major changes to your credit or your business finances, you may still be able to obtain a small business loan relatively quickly if you explore your options.
5. Apply carefully the second time
Beyond the challenges of bad credit or your choice of the wrong business-loan product, there are simple mistakes or oversights on the business loan application that could be the reason you were denied.
Did you have all of the right documents? Did you triple-check your identifying information and every other aspect of the application form for accuracy? Did your balance sheet and profit and loss statements match the business bank statements and tax documents that you provided?
This is the time to get a second set of eyes on everything that you submit so that you don’t risk a second round of frustration.
Being denied a small business loan is a reality that many business owners face, particularly after their first application – but it is by no means the end of your business financing journey.
Allow yourself to overcome your frustration; then follow these steps to dig right back in, solve what problems you can and find the funding your business needs.
This article was originally posted here on Entrepreneur.com.
Dealing With Debt As An Entrepreneur
Debt is all too common for business owners, but these experts can help you see the difference between good and bad debt and teach you how to keep yourself out of it.
The following excerpt is from Mark J. Kohler and Randall A. Luebke’s book The Business Owner’s Guide to Financial Freedom.
As an entrepreneur, it’s important to know the difference between good debt and bad debt. Good debt comes in the form of loans, a mortgage or lines of credit that can be used to the company’s benefit. I call this productive debt.
Bad debt, for our purposes, is debt you can’t leverage when growing your business. I refer to this as reductive debt. It’s money that isn’t working for you in any productive way. Typically, it’s used to buy things you can’t really afford; when that happens, it will never produce a good outcome.
I believe there are three primary reasons entrepreneurs get into bad debt:
1. The ups and downs of cash flow
When the cash is rolling in, there isn’t anything more exhilarating. However, business owners often underestimate the dramatic ups and downs and don’t foresee the months of terrible cash flow. We turn to credit cards to smooth out the ups and downs of cash flows so we can provide some type of economic balance in our personal life. We also presume we can easily pay off the credit card next month, but we don’t. Thus, the crisis begins.
2. Putting too much pressure on our business
3. Being overconfident
Getting out of bad or reductive debt
It’s absolutely critical to your long-term success to expunge all reductive or bad debt out of your life as quickly as possible. Implementing a debt snowball is critical. You‘ve probably heard about this type of strategy of spreadsheet or analysis that can fast-track you to getting out of debt quicker than you ever imagined.
The procedure behind the debt snowball is simple.
- Create a simple plan.
- Stick with it.
- Celebrate your success.
First determine how much of your monthly income can be consistently committed to eliminating reductive debt. You need to commit as much as possible. Seriously, the amount of money you’re going to commit to eliminating this debt has to stretch you.
Next, make a list of all your reductive debts in order, beginning with the largest debt at the top of the list and ending with the smallest debt at the bottom. Be sure to include the minimum payment next to each debt on your list.
Now, you’re ready to implement your plan! Simply take the amount of money you committed to your debt plan each month and add that extra cash to the payment of the smallest debt. Continue to make the minimum required payments to all your remaining payments. Soon, your smallest debt will be fully repaid. Now, the snowball increases in size as all the money you were sending to that small debt is now applied to the next larger debt along with its normal regularly required payment. You continue making these increased payments to that debt until it’s eliminated as well. Then you repeat this process over and over until all your debts are gone.
Staying out of debt
Obviously, the best way to get out of bad debt is to avoid getting into such debt in the first place.
If you want to get out of debt and stay out of debt, it necessitates planning in advance. Here are some core business practices that will help you stay out of debt as you grow and expand:
- Constantly minimising expenses. It’s OK to be frugal. Make sure to read The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley Ph.D. and William D. Danko Ph.D. (Taylor Trade Publishing, 2010..
- Hiring employees only when you can afford to do so and expanding your business when the sales come in the door — not in advance, hoping for the growth.
- Avoiding wasteful spending, and always consider the opportunity costs when making financial decisions.
- Not overextending yourself even with productive debt. Be cautious and try to grow on the profits of the business as much as possible.
- Having ample cash reserves to deal with emergencies and potential downturns in your business.
As an entrepreneur, when you find yourself in a situation where your debt is working against you and no longer working for you, then you need to make that debt disappear quickly. In my experience, the entrepreneurs who make it out of these situations will take quick action to cut their expenses and focus all resources on paying down the debt. Staying out of bad debt should not have to be reactionary; it should be part of your operating plan.
This article was originally posted here on Entrepreneur.com.
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