Beginners Guide to Handling Your Small Business Cash flow

/ November 11, 2021 | 6 Mins Read

Beginners Guide to Handling Your Small Business Cash flow

In this in-depth guide, we're going to take a look at some ways in which you might go about maintaining a strong cash flow throughout the life of your business.

The key to business success or failure is cash flow.

When you don't have enough money coming in, you're in trouble. In fact, cash flow problems are usually what lead most companies down a path towards downfall. Cash flow issues leave companies stuck with an inability to seize growth opportunities. A money crunch can happen at any time for many business owners.

Understanding your current cash position and knowing how to keep it flowing so the heart of your company doesn't stop beating are crucial skills that every entrepreneur needs.

You need to address all three of the keys to positive cash flow if you're going to be successful.

Cash flow management will help ensure there's no sudden interruption in your plans; budgeting helps you plan ahead with an eye towards potential problems down the road and debt reduction can save you from running into significant financial worries.

When you're ready to take on the financial risks of starting your own business, it's important that you not only have a good idea and sound strategy but it's also critical that you can remain cash flow positive each and every month.

In this article, we're going to take a look at some ways in which you might go about maintaining a strong cash flow throughout the life of your business.

One of the easiest ways to create a negative cash flow for any company is by allowing bills and expenses to pile up while waiting on clients to pay their invoices.

It can be easy to ignore slow payments from customers when times are good but it's typically much more difficult to ignore payment delays when sales begin to slow.

Ways to Avoid Cash Flow Issues for Your Business

Here are five tips that will help with cash flow management:

  • Create an effective cash flow-based budget by measuring where you're spending right now. Start with a list of all your monthly expenses and figure out which ones could easily fluctuate in price, then adjust those numbers as necessary for future projection purposes.
  • The cost of carrying inventory can be a huge burden. This is especially true if you have poor controls in place and end up with more than what’s needed, which could lead to storage costs because not knowing how often sales happen means there are no reliable data points for ordering new items when necessary.
  • When it comes to short-term loans, small business owners have a lot of options. Banks are the traditional providers and offer different types for all financial needs: from unforeseeable problems with cash flow or taking advantage during opportunities that arise unexpectedly in your company's life cycle.
  • Always check a client's credit history before you offer them any services. Failing to do this can result in disaster for your business and personal finances, so make sure all potential customers are clear on what will happen if they don’t pay up front-even with bad or no past debt.
  • Every small business needs to be able to rely on its customers for timely payments. This can't happen if you don’t agree on when the deadlines are and what they will owe in return, which is why this must all start well before any invoices need writing.

If you implement these 5 tips and still run into cash flow issues due to outstanding invoices, reduce your bad debt expenses and look into invoice factoring.

Invoice Factoring and its Benefits

Did you know that small businesses can get their invoices factored?

Invoice factoring is a type of asset-based lending - the most common form for small businesses - and it's a great way to acquire capital without having to take on debt.

Here we'll explore some of the advantages associated with factoring invoices to help your business cash flow.

What is Invoice Factoring?

You may have heard the term "accounts receivable factoring" used rather than invoice factoring but do you know what it means?

Simply put, when you factor your invoices, you're using your unpaid receivables as collateral to secure the money you need to cover your current cash flow needs.

Small business owners often turn to invoice financing when they need cash quickly. Factoring your invoices could be the answer you've been looking for to get through cash flow problems and address other short-term challenges associated with running a small business

The process for a small business to get factored in starts with the invoice. For example, a company will advance up to 90% of an invoice's total value, take 2% as their fees, and send the remaining 8% payment after settlement has been finalized--it can also go back into paying off any outstanding invoices that have been paid off by now too. In general terms, there are three types: gross rate (which is charged at 1%-5%), net charge-off level (>95%), or down payment (>75%). It all depends upon what kind of financing option you want & how fast you need funding.

Advantages

  • The process provides instant capital to help overcome financial gaps caused by slow-paying clients.
  • The process of obtaining invoice financing is much faster and easier than traditional loans because there's no collateral requirement or credit checks necessary with this type of service.
  • Invoice factoring is a great option for businesses with bad credit or no established track record.

Qualification Criteria for Invoice Factoring

  • The company must have an active credit rating. The account needs at least 30 days worth of invoices that were sent out within one year from when it was issued. This can help them get access to their funds faster than waiting until all the bills have been paid off and there is no other recourse available should anything else go wrong with this arrangement between lenders.
  • Proving solvency through appropriate documentation provided along with specific information about the company’s assets & value.
  • The company must have a business bank account, tax ID number, and a form of personal identification as valid proof.

Selecting the Right Factoring Company

When it comes to choosing the right factoring company, there are several factors that you should consider.

  • The first is how much money has been invested in your business already and what type of financial agreement will this be?
  • Second, ask yourself if you want monthly interest rates or higher weekly ones with additional margins given at certain points throughout each month (this means more cash)?
  • Third- which specific aspect(s) about running your firm best suit you; managing inventory levels vs revenue generation?
  • And last but not least - is whether the invoice factoring company offers any discounts for early payment!

Invoice factoring is a complex subject that can be intimidating to those that haven't been exposed to it very much, but it's really not all that tough.

Read Sobanco's detailed guide on invoice factoring for more information. 

Government Regulations for Small Business Owners in the United States

The laws and regulations of the United States government have a significant impact on small business owners. In order to run a successful business, you have to be aware of what regulations are in place and where to find the necessary information. Many entrepreneurs don’t think about their strategy or model until after all technicalities have been taken care of by consulting government resources.

As an entrepreneur, you will face many challenges. The first of these is fulfilling regulations and making sure that your business complies with all state laws in order to continue operating effectively on a national scale

We highly recommend following Small Business Regulations (2021): The Essential Guide (unitedcapitalsource.com) as they outline what's required by each individual US State for company owners like yourself who want their businesses successful in the long term.

As an entrepreneur, you should explore more opportunities to regulate in America according to Part 1 - Federal Acquisition Regulations System | Acquisition.GOV. It's a website that provides information on how the government regulates businesses and entrepreneurs alike throughout all 50 states.

In this article, we've discussed some key tips for managing cash flow in order to help you avoid some of the common pitfalls facing entrepreneurs.

Understanding how much money comes in and goes out of your company can help you make strategic decisions about where to invest or what opportunities are worth pursuing, as well as give some insight into whether changes need to be made now so that your company will survive once everything’s set up for success down the road.

Maintaining a positive cash flow is one of the most important things that you can do in order to avoid running into problems with creditors, banks, and other small business financing institutions.

Since cash is the lifeblood of any business, it's important that you maintain a healthy cash flow over the course of your company's lifetime, and invoice factoring can be a great cash flow management solution.

To learn more about finance tips to increase your cash flow, visit 8 Ways to Expertly Manage & Grow Your Business. If you're looking for a few quick and easy ways that small businesses can manage their finances effectively-- look no further than these 8 efficient solutions!

The tips we’ve covered in this blog post can help you better manage your cash flow. You may be able to start budgeting and reducing expenses, vet the clients well before accepting long payment terms, or consider invoice factoring if it would benefit you.

If any of these ideas sound appealing or are something that you have already tried with success, let us know about it! It will give others an idea of what has worked for them too. We hope our discussion on managing your business’ cash flow helped answer some questions about how to improve yours today.

Sam Makad is a business consultant. He helps small & medium enterprises to grow their businesses and overall ROI. You can follow Sam on Twitter, Facebook, and Linkedin.

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