When most people hear this word, they think of a person who is bold, brave, innovative, and determined. They are right to think so. It takes courage and grit to start down the path of entrepreneurship and business ownership. But what non-entrepreneurs might not realize is that entrepreneurs also often experience anxiety, fear, over-conservatism, and over-cautiousness. If you are an entrepreneur who has felt this way, you're definitely not alone, and there is no need to panic. While running a business is complicated, there are steps you can take to avoid unnecessary risks and put yourself on the path to success. One of the many things that can give entrepreneurs anxiety is the prospect of managing cash, but this article will cover aspects you need to know to beat this fear.
The Objective of Cash Management
In short, the primary objective of cash management is never to run out of cash. This sounds simple but is actually incredibly complicated. Entrepreneurs often have to make significant investments in their business long before making enough profit to earn that money back. This can be a major source of stress and anxiety. It is important to be bold enough to take this leap of faith, but it is also important not to do so blindly. Companies that don't spend money can't grow, but companies out of money are out of luck. Cash management in the first couple of years of operation is what makes or breaks small and medium businesses.
Strategies to Defeat the Fear of Cash Management
Know How to Analyze Cash Flow
Cash flow is the flow of money in and out of your business, also called inflow and outflow. Most of the time, your primary source of inflow will be from the sales of goods and services. Other sources of inflow are borrowed funds, investment income from interest, and income from the sale of assets. Outflow is anything you have to pay for, like inventory, raw materials, employee wages, operating costs, taxes, and paying back loans.
To manage your cash flow better and optimally, you will need a plan. A plan will give you a real sense of security when tough times come along. Part of your plan should be the forecast of your required investment. The other part should be your budget. Trusted advisors can be invaluable in helping you learn how to analyze your cash flow, among other things. Try to find a coach, financial expert, or service provider to help you.
Receiving prompt payments from your customers is essential for managing your cash flow. You do not want your customers to think that you are lax on collecting payment, so state due dates clearly and send out overdue notices when you have to. Resort to collection services when necessary.
There are a lot of tools out there that can help you keep track of, manage, and make predictions about your cash flow. These tools are included in certain types of small business accounting software such as QuickBooks, Xero, Sage Intacct or Netsuite. Make use of your accounting data and better manage your cash flow with a tool such as Dryrun. But software can only do so much. It lacks a human understanding of how a business operates. This is why several small and medium companies employ the services of a financial expert.
Understand Cash Cycles
The cash cycle is how long it takes a company to convert investments or raw materials into cash. Cash cycles can be longer than you might expect. It is recommended to have enough funds saved up to pay for at least three months worth of working capital (this is your payroll plus your operating expenses).
Services rendered refers to the end of the service contract between you and a client. It is crucial to keep in mind that you will not constantly be receiving your payment in full immediately after services are rendered. You cannot depend on clients paying right away; instead, you need to have a cushion of funds and other cash flowing in to cover the period between you providing a service and your client paying you in full.
The length of your cash cycles will depend heavily on what industry you are in. Healthcare and retail are two areas in which cash cycles are known to be incredibly long. Large businesses such as an up-and-coming social media platform or a national telemedicine network will require vast capital upfront, usually in the hundreds of thousands of dollars. These numbers are daunting, but this is the risk you have to take if you want a chance to break into industries like this.
Safeguard Against Slow Seasons
Running your own small business almost inevitably means that you will have to weather some tough periods. It is far better to know when these rough patches are coming and how they will affect your business than to be caught by surprise.
One way you can prepare yourself for the slow seasons is to prepare cash flow projections for the coming year. Then run some scenarios. What could you do to remedy the situation if your cash flow were to drop by a certain amount? Even more importantly, what could you do to prevent this situation in the first place?
If you are running a business that you know is busier in certain seasons and slows down in others, you should plan accordingly. Ideally, the surplus from the peak season will more than make up for the losses incurred in the slow season.
Options for filling cash flow gaps include cash reserves, bank loans, and revolving lines of credit.
Know When to Relax or Tighten Credit Policies
A credit policy is the basic set of guidelines you give your customers, which establishes credit and payment terms and lets them know what will happen if they do not pay on time. Credit terms are the deadlines you expect your clients to pay you. When customers pay you quickly, this improves your cash flow, but you will often have to be flexible when negotiating a contract. Many clients will not be able or willing to pay their entire bill immediately.
A prominent aspect of cash flow management is managing your customers' credit. You may have to be ruthless when it comes to cutting ties with unprofitable customers who are costing you more than they benefit you. You will also want to keep an eye on customers who have a history of slow or late payments and make sure you are staying in contact with them.
As unpleasant as it can be, sometimes you will have to refuse credit to a customer. Make sure to keep it civil since you want to keep the door open to them being a customer in the future. When refusing credit to a customer, they will appreciate being informed why in a polite note. You can offer them the opportunity to pay you in advance if they wish, and you might even want to tempt them with a discount if they choose to use cash.
Of course, you will be on the other side of this transaction. It is essential to pay your debts on time to avoid interest and fees and stay on good terms with your creditors. If you can, it is wise to ask your creditors to extend the period before your payment is due to keep the cash in your cash flow pipeline for an extended time.
Keep An Eye Out On Contracts
Trying to renegotiate contracts to your advantage is almost always worth a shot. For example, if you are renting a physical property to run your business out of, see if you can talk your landlord down to a more favorable rate when your lease ends. Something may have changed on their end that will make them willing to negotiate. Negotiating a better rate for yourself in your contracts will mean that you will increase your cash flow.
You will also often find yourself renegotiating contracts with your clients. This can happen because one or both of your circumstances have changed, or you have realized over the course of the contract that it is not ideal, or there are flaws in the contract. Good advice for renegotiating is to be flexible in some areas but firm in others. Sometimes it is in your best interest to allow a client to pay in small installments or over a longer period if you are certain they will pay when given these accommodations. Being flexible when possible keeps the relationship between you and your client positive. At other times you will have to put your foot down and stick to your contract because changes will damage your business. Even when you have to refuse requests for changes to a contract, remain polite and explain your reasoning in an attempt to maintain a good relationship with the client.
When negotiating and renegotiating, remember to keep a cooperative and problem-solving mindset. The other party also wants the best possible terms, and you will have to give them compelling reasons to change the contracts. Instead of focusing on "winning," focus on finding the perfect medium that satisfies both of you.
An entrepreneur, even a seasoned one, can be wary of cash management. This article should put many of your concerns to rest. Hiring a financial expert is always the best bet if you still have any concerns. They will often be able to identify issues based on their own varied experiences, uncovering risks and opportunities to strengthen your position. There is naturally a lot of risk-taking involved, but you can handle these risks wisely and grow your business into a fruitful one with careful planning and wise decisions.
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