The following guest post is by David Sederholt, COO of Strategic Funding Source, Inc.
The financial universe of most hard-working small business owners is often very focused and revolves around their immediate obligations. They know that cash flow is the heartbeat of their business, and if they don’t have the cash on hand to pay their vendors, they don’t open the next day. It’s important to remember that some of the cash flow pain that these entrepreneurs face is the result of less than creative cash management. With some simple tricks in cash management, the ups and downs of income vs. expense tides can be stabilized:
1. Don’t pay everything at once. For a small business, cash flow management is like being an air traffic controller. You can’t have 100 planes trying to land simultaneously on two runways. We regularly see clients line up their monthly bills, sit down and write all the checks at once. They hope that they put aside enough cash or that their upcoming sales will float their payments through. In the worst case, checks bounce as the bank cannot cover them. This is like Russian roulette with a check book. These costs slam cash flow and ruin relationships with those who are currently offering you credit. It is okay to write the checks all at one time, but you need to put them into a “holding pattern.” Mark each envelope with the date you should mail it in order for it to land on time and without crashing into another check. Stagger the payment dates by setting up three tiers for disbursement of checks:
Tier 1: Must Pay Group – These are the checks that can hurt you the most either in cost or ability to operate your business if they aren’t paid. This includes items like payroll, taxes, rent or late utility bills.
Tier 2: Important to Pay – Items like oil bills, utilities and insurance payments will often have a reasonable grace period or a financial penalty modest enough to take advantage of having this cash on hand when needed. But these are still important bills to pay because you don’t want to get cut off. There‘s nothing more destabilizing than having your electric shut off in the middle of a business day. You could lose customers and employees who worry about the health of their employer.
Tier 3: Flexible Payment Opportunities – Suppliers, vendors and wholesalers who supply most small businesses are the best sources of flexible financing. Many of these are happy to work with a stressed business as long as there are regular payments scheduled, even if they are small. These suppliers will often continue to deliver as long as you keep open channels of communication and make payments with regularity.
2. Make it real! Pay on revenue you have, not on the sales you are hoping to make. Would you land a plane hoping that the runway is beneath you in that fog bank? No, you want to know it is there, so only make payments knowing your sales are in the bank. If you know what you have, you will know what you can pay.
3. Stop using sales tax money to float your operations. It will cost you far more in potential penalties, fees, interest, time and aggravation than obtaining some short term financing. The most prudent strategy is to discipline yourself to deposit all the sales tax money you collect each day into a separate bank account. Tax liabilities grow because business owners use the tax money they collect as working capital for their operations.
4. Invest in a payroll service. The two biggest cash flow crunchers are payroll and sales taxes. It may seem like an unnecessary cost for very small businesses, but a good payroll service can be invaluable, particularly in the collection and payment of payroll taxes. Rather than worry about saving the money and making progress payments to federal and state agencies, let the pros do it.