Cash flow issues are a bigger problem than most people think:

• 61% of SMBs struggle with cash flow, according to Intuit

• 32% of those are unable to pay vendors, loans, themselves, or their employees

• 82% of failed SMBs went under because of cash flow problems (Score).

So, this week, I’m sharing my comprehensive, 13-step guide for managing cash flow.

Let’s get into it.

The simplest way to think about cash flow management is to divide your approach into three phases:

1. Preparation - Steps 1-3

2. Today’s Operations - Steps 4-10

3. Emergency Management - Steps 11-13

Phase 1: Preparation

When you don’t need money, it’s easy to find.

When you need it, it’s hard to find.

No matter how difficult it is for your business at the moment, these are the 3 steps you should take to prepare now.

Step 1: Emergency Fund

The main cash flow problem is actually NOT that there aren’t funds in the pipeline. It’s that businesses don’t have the funds available for real-time expenses.

Keep 6 months’ worth of expenses in cash so you’re not surprised in case of an emergency.

Step 2: Get a Line of Credit

A line of credit is the equivalent of a credit card for your business. It’s good for buying new equipment, taking advantage of growth opportunities, and bridging gaps between payables and receivables.

Just be as careful of overspending or late payments/defaults with these as you would with your personal cards.

Step 3: The Lease vs Buy Decision

If there’s any uncertainty in your business, then you should lease over buying. Once the uncertainty is reduced, buying can then be a fantastic choice.

Until then, leasing keeps you from having too much cash tied up.

Phase 2: Today’s Operations

Once you’ve taken the preparation steps, you can pull many other levers to improve your cash flow. Steps 4-10 are simply the most impactful.

Step 4: Pay Bills Strategically

Above all, prioritize your bills.

In practice, this means

• Using the credit period or negotiating better payment terms

• Paying on the last day

• Keeping cash for as long as possible

The rule of thumb here is to collect new revenue as quickly as possible and hold onto your cash as long as possible. Doing so minimizes your risk of short-term liquidity issues.

Of course, there are exceptions to this rule like early-pay discounts, so be sure to familiarize yourself with the full range of payment options for each vendor you bring on.

Step 5: Negotiate With Your Vendors

Your goal here is to turn vendors into lenders.

This doesn’t just mean asking your existing vendors for better payment terms. You’ll want to talk to other vendors, even if you have no desire to change. This is because having options is your best form of leverage.

Counterintuitive as it may seem, terms can be more important than pricing. So even if you’re getting a good deal now, I wouldn’t skip this step.

Step 6: Handling Receivables

The goal is to get your money fast.

Here’s how to do that:

• Take upfront payment

• Offer early-pay discounts

• Streamline your collections process

• Offer multiple payment methods

• Make sure invoices are 100% clear and error-free

• Shift from monthly invoicing to “when work is done” invoicing

On top of reducing the lag time between payables and receivables, collecting as much as you can upfront also reduces your risk of having to write off as much bad debt.

Step 7: Reevaluate Your Cost Structure

Ideally, this will be done quarterly. But at the very least, you should revisit your cost structure each year.

To do so, ask these questions":

• Are there any recurring products/services that I no longer need?

• Is there anything I can outsource to a freelancer or agency?

• Can I scale back part-time work during slow periods?

Even if you’re not able to trim as much fat as you’d like, being aware of inefficiencies in the business can drive you to find more efficient ways of converting your existing resources into new revenue streams.

For example, a landscaping firm may be unable to perfectly up and down-staff according to seasonality. In response, it may offer light installation services over the holidays to make better use of its slow period.

Step 8: Align the Payroll Cycle

Your goal is to match the timing of your payroll expenses to your largest revenue streams as closely as possible. State law, industry norms, and other factors may limit your flexibility here, but monthly, bi-weekly, or weekly are all potential options.

For manufacturers, wholesalers, install-only home service contractors, and more, payroll can be especially difficult to manage. If it’s among one of your biggest expenses, optimizing its timing can make or break your cash flow.

Step 9: Use Business Credit Cards

If you’re not using a business card, consider getting one.

As long as the spending you’re doing on it is well within what the business can afford, using a business card grants you additional time to pay the bill, allows you to earn cash back, and offers other rewards.

Step 10: Use Technology for Payments

This one seems obvious, but a lot of businesses still don’t offer online payment options. Giving clients an easy way to pay may cost a bit more upfront, but it makes collections far more efficient. It also reduces your risk of writing off as much bad debt from uncollectible accounts.

Unless your client base has no interest whatsoever in quicker payment options, I recommend investing in a mobile payment solution.

Phase 3: Emergency Management

No one thinks that emergencies will happen to them, but sometimes they do.

If you are in one, here are 3 steps you can take.

Step 11: Liquidate Assets

I know you don’t want to hear this. But trust me when I say that one step back here can mean two steps forward.

It’s better to move backward for a time than to collapse. Remember also that you will likely be able to buy the asset again in the future.

Step 12: Explain to Debtors, Suppliers, and Employees

Many suppliers are willing to listen and work with you if you treat them like a human and explain what’s going on.

The key is to be upfront and honest.

Employees can also be understanding if you’ve shown that you have their best interests at heart.

Step 13: Offer Heavy Discounts

You’ll want to drop your prices temporarily to get more sales. This is especially the case if you need to move old inventory.

In addition, offer early-pay discounts here if you don’t already.

I hope this guide helps you manage your cash flow properly. It’s also worth having a bookkeeper and reviewing your key KPIs monthly.

If you haven’t hired a bookkeeper yet, DM me or reply to this post. It’s the first step to getting your finances in order.

Putting It All Together

Here are your top takeaways from this week’s post.

1. Managing your cash flow requires a three-phase approach: preparation, today’s operations, and emergency management.

2. The preparation phase is all about getting organized and making sure that you have enough cash on hand when you need it. To do this, pull together a 6-month emergency fund, secure a line of credit before you think you’ll need it, and lease what you can instead of buying outright until you’re in a healthier cash position.

3. Streamlining today’s operations means prioritizing the timing of your bills, negotiating better payment terms, improving your collections process, trimming fat from the business, matching payroll timing to major inflows, using business credit cards, and investing in online or mobile payment options.

4. In an emergency, liquidate your assets to free up cash immediately. You can also explain the situation to vendors and employees and offer heavy discounts to secure as many sales as possible. These steps are designed to get your business through the crisis as efficiently as possible. Keep in mind that moving backward for a time here is far better than going out of business entirely.

Hungry for More?

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‘Til Next Time,

Connor