Small business owners would usually go anxious during months when profits unexpectedly go down. But there ways in which planning can be done ahead in managing cash flow during lean season. You will also prevent yourself from going downhill if you plan your finances carefully.
Since cash flow is the most important thing to keep a business running during slow months, here’s our take on the top cash flow hacks you can do even in the toughest of times.
- Manage Your Budget
Having a budget will help you plan for your ideal sales target every month. Start by reviewing your sales results from last year. Change the numbers according to expected monthly revenues, which will be based on any information and investments for this current year. You can also check last year’s sales by customer to see who purchases at certain periods of the year.
It’s also best if you stockpile cash in advance, or save for the rainy days. This way you can have buffer money that you can tap into when sales are low. For big investments, you can go for equipment financing or buying it through installments to even out expenses all throughout the year.
To further manage your budget, take a closer look at where your money is going in business. What are the things that are leaking money away and how can you lessen the costs? Try delaying cosmetic improvements or renovations, and do them after you have received a bigger cash flow.
An effective way to stay on top of your finances is to use software or apps that track the inflow and outflow of money. It’s a vital step to manage your cash flow and not go overboard with expenses. Use tools such as Cushion, UpYourCashFlow, Pulse or Float that can give you a clear overview on where your money is going.
2. Match Your Cash Flow
Now that you’ve made some sales projections, you can now co-relate that with projected monthly cash flow. Start reviewing your monthly cash flow statements from your accounting system. Add information such as current payables, receivables, current budget projections, and inventory turnover to determine how much cash flow you can receive in a month.
You can never know if your sales projections would be truly accurate for a certain month, so you need to keep updating your projections. Proper planning, forecasting and a regular review of your financial sheets can help you determine how money moves in your business.
3. Negotiate With Your Vendors
You may be able to negotiate terms with your vendors, especially when you present certain months during the year as having slower cash flow. For example, if you have a 60% profit during the summer season, but only have 40% profits during autumn, then you can show these cycles to your vendors in advance to re-negotiate payment terms. In case your payments will be late, notify your vendors immediately so that they can also plan for their cash flow needs.
Another thing to note is to manage your payables wisely. Pay your vendors, suppliers or contractors on time, but not ahead of schedule. Maximise your payment terms so that you can have interest-free capital in your disposal. Seek out suppliers who can give you a 30-day or 60-day credit limit for you to maximise your working capital.
4. Make a System of Collecting Payments
You can ask a deposit from customers for those projects started during lean months. This can help you manage cash flow during those times, as more of the project requirements need to be paid upfront than usual. You can say that they have to make a 30% to 50% downpayment as an assurance before starting the project. If this goes well with your customers, you can also do this all throughout the year.
To ensure that you get paid as soon as possible, issue invoices immediately after delivery. Follow up on clients and remind them to pay you promptly. You can also indicate late payment penalties in your contracts to motivate customers into paying early.
Provide a variety of payment methods to your customers. Check out the field if there are common payment systems that most people are using. Take for example Paypal or other online banking payments that people are using in your locality. The more options you offer, the more likely it is that a customer will pay you immediately.
You can try cash-free invoicing, which is fast and convenient for both parties. Do consider including bank deposits, bank transfers, credit or debit card payments, check or cash payments in your business as well.
If you are still required to send paper invoices, a sure-fire way for customers to not ignore you is to create professional-looking invoices. Include your business logo, branding elements, contact details, and other essential information. These things should be easy to look at and read through so that your invoice will be given importance.
5. Supplement Your Income During Slow Months
You can also seek out alternative business options during the slower parts of the year. What else could you offer to your market when an item is off-season? What other services can you provide which will complement your main offerings? Diversify into off-season alternative products or services so that you can keep earning even if it’s not your peak season.
You can also collaborate with other businesses to offer off-season deals to customers. Another tactic is moving your sales online, so that you can cater to national or international customers besides your usual local customers.
Managing your inventory is also crucial for consistent cash flow. For example, if you have any inventory left at the end of the season, consider marking them down and selling them at a discount. This can increase your off-season revenue and cut down on carrying costs. Try asking your suppliers as well if they allow merchandise to be returned for a credit against next season’s order.
Avoid overstocking to prevent unnecessary spending. Stock more on fast-moving goods and supplement it with slow-moving goods to keep your inventory in order.
If you have equipment that you no longer use, consider selling these for a quick buck. Idle equipment ties up capital that you can actually use more productively. Equipment that has been owned for a longer period can have a price equal to its salvage value or less. This can also be used as a taxable gain that can be reported in your tax filings.
To further supplement your income, consider saving some of your profits in interest-earning accounts. From this you can keep your money growing even if you’re not using it for working capital. Part of your savings can also go to stocks or mutual funds, which will grow your money as passive income. Having different income streams in the form of active income from your business and passive income in other investments will give you various opportunities for financial growth.
6. Get Small Business Financing
There are banks and online lenders which offer small business loans to help you with short-term financing. For example, if there are invoices that haven’t been paid yet and you need to pay your staff in a couple of days, you can apply for a short-term loan to pay your employees immediately and repay the loan when your invoices have been paid. If cash flow is tight at the moment, you can opt for the following financial solutions to help finance your current business needs.
- Short-Term Loans
Take advantage of this loan solution when you’re planning to finance one-off business investments. A short-term loan is a good option when you need money quickly. It also requires less requirements to get approved. However, it can come with high interest rates. Loan terms are usually within 3 to 18 months, with interest rates starting at 14%. You can loan from $2,500 to $250,000. Time to get approval would commonly take 2 days.
- Equipment Financing
This is when you need financing for an equipment needed in your business. There are terms where instead of paying for the full cost of equipment upfront, you can use asset-based loans. Lenders will focus more on how much the equipment will cost instead of your personal credit score. Your equipment financing will last for the expected lifespan of the equipment, so you won’t have to pay for longer than you’ll get to use it for.
- Business Line of Credit
A business line of credit allows you to borrow an agreed amount, and pay for the interest on what you actually use. Take for example the bank approving a line of credit for $100,000, but you only use $50,000 from it. You’ll only pay for the interest of the $50,000 you used. You can repay the loan at your own pace and have the flexibility to get money only when you need it. There are also many small businesses out there that use interest-only line of credit during times of the year when cash flow is slower than usual. They will eventually pay it off when sales increase during another season.
- Business Credit Cards
This is a popular form of small business finance, but the interest rate is usually high. They do offer an interest-free period on charges. For example, if you pay off the loan amount within the 55 days of the charge, you don’t have to pay for any interest. If you’re going to apply for a business credit card, the card provider will require you to submit information such as income, length of time in business, credit report, and credit score to determine your credit-worthiness.
- Business Overdraft
This allows you to run a negative balance in your regular transaction account up to a certain amount. You’ll have to pay the interest on any funds that are overdrawn. Besides the interest to pay, you’ll also be charged with certain fees. You can get business overdrafts in secured or unsecured forms.
- Merchant Cash Advances
If you have poor credit, this type of loan can help you with immediate financing. With a merchant cash advance, the lender gives you a lump sum of money, which you pay back by allowing the lender to take a fixed percentage of your daily credit and debit card sales. You can loan from $2,500 to $250,000. Time to get funding approval would take 1 to 2 business days.
- Invoice Financing
This is best for business owners with unpaid invoices. You submit the invoices to a financing house, and they’ll give you payment in advance. You get the funds once the invoice has been paid by the customer, minus fees and charges.
- Unsecured Business Loans
Unsecured loans are perfectly suited for small businesses due to the convenience of getting them. You won’t have to go through a complicated application and lending process. The lender will analyse your finances, which includes bank transactions and other information, to determine how much will be loaned to you. You also don’t need to provide collateral. Unsecured loans can be approved in as quick as 24–28 hours, and at times you’ll only need to show bank business statements and financial management information.
Managing cash flow need not be a big obstacle for business owners. With the cash flow tips mentioned here, you can stay ahead in business and be ready for any contingency.
Take the opportunity during off-peak seasons to put your business to the next level — what strategies can you implement or marketing tactics to boost. Make the most out of those times to succeed when other businesses might flounder. You’ll learn a lot of important strategies to make your business more profitable during those months when sales are down. It’s during those lean months where you are moved to become more creative and tenacious in making your business thrive.
Among the aforementioned types of small business financing, a business line of credit is becoming an essential for small business owners to thrive at any season. Start getting an unsecured loan or business line of credit here to support your business needs.
