When running a small business, it is often tempting to simply ignore the statistics and get on with the day-to-day process of management. However, although you might get away with doing this for a short while, over the long-term this “head in the sand” approach will lead to big trouble.
Cash-flow is the lifeblood of small businesses and without careful management it will cause numerous financial problems. If a small business finds itself short of cash, this can be difficult to fix. Cash is needed to buy supplies or pay wages so that you can continue to make money. A severe cash shortage can often only be remedied by a short-term bank loan or outside investment.
To avoid a situation like this from occurring, it is important to take a pro-active hands-on approach to cashflow management. In particular, you should take steps to speed up the amount of time it takes for you to receive payment from customers. It is no use to be owed large amounts of money, you need the money safely in the bank for it to be of any use to your business.
To try and manage cashflow as efficiently as possible, provide incentives such as small early payment discounts to encourage customers to pay up quickly. You should also look to try and delay paying supplier bills by taking advantage of the 30 or 60 day due dates on offer. Don't pay bills straight away just because you have the money, this is poor cashflow management.
An additional thing to remember is that your inventory is not cash until is sold. Many small businesses think they will save a few pennies by ordering in large quantities, but if it cannot be sold then it is essentially just dead weight for your business that you may end up selling later at a discount.
Disclosure:The author Stefan Töpfer, Fellow IOEE, is CEO of WinWeb.com - a leading cloud based small business infrastructure provider (small business software, e-Commerce solutions & business process outsourcing) - the views and opinions expressed are his and are based on over three decades of personal experience as a serial entrepreneur, #1 small business blogger, mentor and angel investor in the SME/SMB sector.