As a mompreneur, you are faced with the need to balance many facets in life and business, particularly if you opted to start a business to allow you to work from home to spend more time with your children. This is never more true than in the first 5 years of business when the risk of failure is at its all time highest.
In my experience, as an entrepreneur with my own business and as a business coach/consultant to solo-preneurs up to organizations with over 100 employees, cash flow management is critical to longevity. Creating a financial plan that focuses on profitability is not enough.
Cash Flow – The difference between the available cash at the beginning of an accounting period and that at the end of the period. Cash comes in from sales, loan proceeds, investments and the sale of assets and goes out to pay for operating and direct expenses, principal debt service, and the purchase of asset
Why is cash flow so important? The flow of money coming in and going out can affect your ability to obtain the resources you need to conduct your business. If you don’t have enough cash on hand, you cannot:
- purchase supplies for your product,
- avoid interest penalties,
- hire the expertise you need so you focus on what you do best
- take advantage of new opportunities in the marketplace that could improve your market share, profitability, reduce your debt or grow your business.
- pay yourself and your team.
What steps are necessary to improve your cash flow today to achieve your financial and business goals tomorrow?
1. Be Quick to Bill & Collect from Customers. This may sound like common sense but, many entrepreneurs (myself included), regularly either fail to invoice or send their invoices late. Getting paid quickly and on time is one of the best and most effective ways to improve your cash flow.
- Schedule time at the end of each week to create and send invoices for your weekly sales. This will speed up when you receive money.
- For larger projects, invoice at least once a month rather than upon completion. Ask for advances if you have to purchase supplies on behalf of your customer, or have suppliers direct bill the client.
- Include a payment due date on every invoice with a penalty for late payments, or offer a small discount if paid within 10 days. Your goal is to get paid as quickly as possible!
- If a customer is late, follow-up right away… don’t wait. Create standard emails, scripts for phone calls, letters to use at each step of the process.
- Clients who consistently pay late probably can’t afford your goods and drain your time and energy. Consider dropping these clients as they hinder cash flow.
2. Manage your Inventory. Product based businesses must carry inventory. Inventory control is critical to fulfill orders and satisfy customers. If your inventory turnover is not efficient, too much of your money is tied up in stock and unavailable to you. Identify the lowest possible inventory you must have on hand to fulfill all orders on time, and with sufficient time to refill stock for future orders. Set minimum and maximum stock levels for each part or product and manage this critical cash flow drain.
3. Don’t forget money drains in your business, such as your office supplies! How much money do you have tied up in pens, clips, paper, file folders etc. that are just waiting for you to use them? Stockpiling takes up space and money. Free overnight delivery is available from many suppliers to replenish supplies quickly.
4. Pay your bills on the due date. Consider payment terms from your suppliers. Flexible payments can be more valuable than rock bottom prices. Also, schedule all of your bills to be paid on the date they are due. With electronic payment scheduling, this is a time effective way to keep as much money in your cash flow as you can to the last possible minute. Why pay early if there is no incentive to do so?
5. Monitor cash flow with projections
Cash flow projections are one of the most important things you can do for your business. Like a business plan or mission statement, cash flow projections are a must do plan for your future. Over estimating income and underestimating expenses is a common challenge and can result in a cash flow pinch. Created easily using a spreadsheet, your projection will consider when money is actually coming in and going out so you can identify the impact of your business decisions.