According to a recent study by CB Insights, the second biggest reason for small business failure in America is cash flow problems. Many small business owners don't even bother to educate themselves on the subject, but even those who do often find themselves woefully short of funds and have to close their doors as a result.
The dirty secret about cash flow is that even outwardly successful businesses can go under as a result of mismanagement. Sales might be great, customers might be pounding at your door, but if you don't have the money to deliver your product when you say you will, none of it matters.
Pay attention to these four fundamental steps if you want your business cash flow to stay healthy:
1. Build your credit history now.
Nothing guarantees dollars when you need them like strong personal and business credit scores. My complete lack of credit was my number one obstacle when I started out. Strong credit scores tell lenders and credit card providers that you're trustworthy. Low or nonexistent ones send the opposite message, and good luck finding a short-term loan to cover payroll or satisfy your vendors when you're in that category.
You don't have to start big. My first credit card had a limit of $500 dollars, and was completely backed by a check that I sent American Express. They didn't trust me at all, so I used that card for everything. I maxed it out and paid it back, maxed it out and paid it back, until slowly but surely my limit began to increase.
Eventually, I had half a million dollars in various financing vehicles at my disposal. It happened faster than I thought, and made every difference when it came to paying for vehicles, materials, help, etc. Don't wait for a crisis to improve your credit; by then it'll be too late.
2. Ask your customers to pay early--beg if necessary.
Let's say that you've invented a time-saving device that beats everything else in its market. Your idea goes viral and you have a mob of people clamoring for one by Christmas.
But making stuff costs money. You need help assembling your product, which requires employees; you need parts that are beyond your ability to create, which requires specialists and materials; you need shipping and shipping supplies and dozens of other expenses; it adds up fast.
Crowdfunding is an effective method for having your customers cover productions costs. You can also offer discounts and other perks to those who pay early. I used to put on a suit and literally drive around town explaining my predicament and pleading for mercy. Swallow your pride and do whatever it takes; all that matters is that you fulfill your promises.
3. Seek generous terms with your suppliers and vendors.
Ask your customers to pay early, but try to pay your vendors and suppliers as late as possible. Look for net-60 or net-90 terms, which means that you can receive a service today while kicking the bill a few months down the road.
Securing these terms brings me back to the importance of the first item on this list: Build strong credit. The major business credit bureaus compile financial payment history on things like business lines of credit and credit cards, but they also include tradeline data from net-term arrangements like I mentioned above.
A history of on-time tradeline payments signifies to vendors and suppliers that you're not too much of a gamble--that they can safely extend you longer payment terms without incurring too much risk.
4. Have a Plan B in case your runway runs out.
Growing up on a farm, I learned the business of seasonality. My parents were always working hard, but some months of the year we were struggling to make ends meet, and other times we were living comfortably.
What's most difficult is expecting the unexpected. You can cut operational expenses and run campaigns to boost revenue, but these tactics can't always account for all that could happen in an emergency situation.
This is where your emergency fund comes in. Whether it's credit cards, a line of credit, invoice financing, or some other sort of funding, it's always good to have an emergency fund to draw from when the going gets rough.