How to Prevent—and fix—Cash Flow Problems
Editor’s note: This article is the last in a three-part series on the subject of protecting and managing cash flow. Read part one from October 2013 Glass Magazine and part two from November 2013 Glass Magazine.
One challenge of owning a business is that you can spend a lot of time and resources doing the “right things” and still end up in financial trouble. For example, clients with spotless payment records can begin to pay slowly, sending your cash flow into a tailspin; your company might grow too quickly and run out of funds to pay suppliers; or, you could simply get hit with unexpected expenses.
Financial surprises can happen at any time, and the best strategy is to be prepared. One simple way to prepare for financial surprises is toz build an emergency cash reserve. If there is one piece of advice that I want you to remember from this article series, it is that you should always have a cash reserve.
How to Build a Cash Reserve
A cash reserve gives you the flexibility and breathing room you need to operate your business normally.
Obviously, you plan for and build a cash reserve while things are going well for your glass business. The problem for most business owners is that when things go well, they tend to reinvest money into the business or take it out as profits. There is nothing wrong with reinvesting money or taking profits out, but doing so before you have built a reserve could be costly in the long run.
Depending on whom you ask, your cash reserve should cover your operational expenses for three to six months. Consult your accountant to determine your cash reserve needs, and then develop a plan to accomplish that goal.
Building the reserve is simple. Every month, direct a reasonable portion of your profits to an emergency bank account until the fund reaches the planned amount.
One downside to having a large reserve, however, is that your money is parked in an account that can’t be used for anything other than emergencies. This strategy might cost you opportunities, so you need to balance this cost against the benefits of a large reserve.
Your reserves might not always be sufficient to handle your financial problems. In this case, you need financing. Unfortunately, getting bank financing while you are in the middle of financial problems is difficult. Unless you have collateral, banks aren’t eager to lend you money. A Microloan, though, might be the right solution for you. Microloans from the Small Business Administration are special loans up to $50,000 that don’t have the conventional requirements of a traditional loan and are often available to small businesses without extensive credit history or substantial collateral.
Microloans are provided by intermediary institutions that also offer financial advice and counseling to growing businesses. These benefits can make Microloans an ideal alternative for companies that have growth potential and cash flow problems. Learn more about this program.
Financing your Invoices
Many glass companies experience financial problems simply because they can’t afford to offer payment terms to clients. Their clients have good credit and pay on schedule, but these qualities don’t help glass companies that need the money sooner to operate their business. If you have this problem and can’t get a business loan, consider financing your invoices.
Invoice financing provides an advance using your invoices from creditworthy customers as collateral. Instead of waiting up to 60 days to get paid, you get immediate funding from a finance company. The finance company then waits for your client to pay. Invoice financing can be advantageous if your business is growing quickly but your clients are demanding payment terms.
The main advantage of financing invoices is that getting this type of funding is easier than getting a loan. The most important qualification requirements are to have solid clients and unencumbered invoices.
Putting it All Together
Managing the financial aspects of your business doesn’t have to be laborintensive or difficult. It’s a matter of methodically following a set of rules.
As we discussed previously, provide payment terms only to clients with good commercial credit. Otherwise, you risk accumulating bad debt. Pair this approach with an effective invoicing and collections strategy that ensures your payments come in as quickly as possible. And, lastly, have a financial reserve or access to funding that you can use for emergencies. If you do these things correctly, you should avoid the majority of common financial problems.