Running a small business is a bit like juggling – there’s always something to keep in the air, and it only takes one misstep for everything to come crashing down. While the thrill of delivering quality products, expanding your brand, and making customers happy can be exhilarating, one simple truth stands out: cash is king. 

Understanding how money moves in and out of your business is crucial to keeping everything running smoothly. Yet, cash flow issues are among the most common headaches for small business owners. In fact, according to the SMBA, over one-third of small businesses cited “lack of capital” as the primary reason they had to close. That’s why it’s so important to plan ahead and ensure that your business always has the funds it needs.

Proper cash flow management involves anticipating both the money coming in and the money going out. To do this effectively, you need to know your current financial situation inside and out, including your payment processes and debts. Additionally, having a plan for handling any unexpected disruptions is key to avoiding potential cash flow crises.

Fortunately, most cash flow issues stem from a few common causes. By understanding these, you’ll be better equipped to prevent them or at least manage them more effectively when they arise.

Creating a Budget

Budgeting is essential for gaining control over your business expenses. However, in 2021, more than half of small businesses didn’t have a formally documented budget. If you’re looking to create one, start by setting specific and realistic financial goals. Overestimating your expenses – assuming you’ll pay more this year than last – can give you a buffer and help you avoid surprises.

While some may see budgeting as restrictive, having a budget actually provides a financial focus. It also gives you a benchmark to measure against when making spending decisions throughout the year. Remember, a budget is a living document, not set in stone. As your business grows or as external factors like inflation change the cost of goods, revisit and adjust your budget accordingly.

Building an Emergency Fund

Just like in personal finance, businesses need to be prepared for the unexpected. Unfortunately, many small businesses aren’t as prepared as they should be. Surveys show that 17% of business owners would have to close if they experienced two months of declining revenue. Additionally, 25% of businesses don’t reopen after a disaster.

Having an emergency fund can make a huge difference. This fund can help cover unexpected expenses, such as a surprise tax bill, a sudden increase in supply costs, or repairs after a disaster. To start building your emergency fund, first determine how much you need to cover your immediate expenses for one month. Then, decide how many months’ worth of expenses you want to save. Even if you can only set aside a small amount each month, it’s important to start. Set up an automatic transfer so you never forget, and make sure the money goes into an account designated solely for emergencies.

Managing Late Customer Payments

Customers are the heart of any small business, but when they make late payments, it can cause serious cash flow problems. Unfortunately, late payments are all too common, with 87% of businesses reporting that they typically get paid after their invoice due date. 

To help avoid this issue, consider making a few small changes. Send invoices promptly, offer multiple payment options, and be clear about payment terms and expectations upfront and on every invoice. You might also want to ask for a deposit or full payment before starting work, and consider charging a late fee to encourage timely payments.

Planning for Growth

Growth is generally good news for a small business, but if it happens too quickly or without a plan, it can strain your finances. Many business owners plan to expand their current location, service, or website, or even open additional locations. But growth often comes with increased costs – more employees, better equipment, larger office space, or higher shipping expenses.

To prepare for growth, create a plan for the expenses that will come with it. This might involve securing financing through a bank, applying for a small business loan, or using a business credit card for smaller purchases. Each option has its own pros and cons, so it’s important to research and plan ahead.

Paying Yourself a Salary

When cash is tight, it’s tempting to skip paying yourself to keep more money in the business. In fact, 26% of small business owners don’t pay themselves a salary. However, this can lead to more stress and distraction, negatively impacting both you and your business. Moreover, not paying yourself can cause issues come tax time.

Instead of going without, research what a fair salary for your role should be. Consultants, industry trade groups, and entrepreneurs in your field can provide guidance. One survey found that 46% of founders pay themselves less than $100,000 annually, but the key is to find a balance that reflects your business’s financial health and your personal needs.

Cash flow problems are a significant source of stress for small businesses, but they’re not inevitable. By understanding the common causes and taking proactive steps, you can keep your cash flow steady and focus on what really matters – growing your business.