Cash flow is the life's blood of your business, and poor cash flow management is guaranteed to bring you headaches, at the very least. If you're one of the countless small business owners who are learning how to manage finances by simply doing it day by day, here are three tips to get you on the right road with your working capital:
1. Pay Attention to Your Working Capital
You may look toward profits on the horizon to gauge the health of your new business, but it's helpful to use a magnifying glass as well as a telescope. Specifically, keep a close eye on your working capital.
Can you meet your payroll every month and keep the lights on? Are you paying your vendors promptly? Do you have enough cash on hand to make your debt payments? You can find good business accounting applications that will chart your revenue vs. expenses in real-time formats. A clear understanding of your working capital is essential for keeping the company running day to day.
2. Plan Your Cash Flows
Just as you need a clear grasp of your moment-to-moment cash position, you also need a definite long-term financial plan. This plan should reflect your business strategy.
For example, it should allocate percentages of revenue for covering regular expenses, growing your customer base, marketing your product and engaging in R&D. Your long-term financial plan should be the practical expression of your company's mission and vision. And in particular, it should methodically account for all your cash flows.
3. Get a Line of Credit
This is actually another form of planning ahead: If you establish a relationship and a credit line with a lender ahead of time, you'll have the peace of mind to confidently cope with an unexpected rainy day. You don't have to go it alone as a small business owner; there are lenders ready and willing to provide you the safety net you need.
Bonus Tip: Take Out a Term Loan for Longer-Term Projects
Cash flow can be uneven for small businesses, especially in the early months. Trying to subsidize the cost of future growth solely by using current revenue can slow down your momentum and lead to unnecessary stress. If you try to finance it with your line of credit, you're taking an important tool out of your working capital toolbox.
Instead of tying up all your working capital on long-term projects, take out a term loan with an affordable APR. (You can ballpark how much you qualify for using our loan calculator.)