We all know how important cash flow is. A steady stream of income that’s more than enough to cover expenses is what helps us stay in business–it’s what makes our businesses function to begin with. When cash is flowing in, all is well. Clients are paying on time, there are no unexpected expenses, and stress is at a minimum.
However, as many small business owners likely know, cash flow gaps do happen. Once in awhile, that predictable income can quickly slow to a trickle or stop altogether, causing bills to pile up and near-panic to set in.
What causes cash flow gaps?
Small businesses may not always know exactly when a client’s payment will arrive, even when there are no hiccups in the payment process. It’s hard to decide when to buy more raw materials or retail inventory when you can’t pin down the day that cash will arrive from your biggest client. Some companies pay in 30 days, but more often it’s 45 or even 60 days before a check is cut.
Cash flow gaps happen to businesses in all industries but are especially prominent in product-based ventures, where you need to purchase goods in order to have them to sell. The delay between ordering products and having them available to sell can cause cash shortfalls.
Another challenge is that small businesses generally don’t have the clout or leverage to force a client to pay up when a bill is outstanding. However, if you’re a service provider with an ongoing client, you do have more leverage than most; you can choose not to hand over your next deliverable until the last one is paid for.
Whether your company relies on computers, vehicles, or machinery, some of your equipment is liable to break down just when you need it most. To avoid compromising your business, you’ll want to replace equipment as soon as you can, and that may be before you’ve received payment from an account. Spending to replace essential equipment can often result in a cash flow gap.
Ramping up for a contract
In order to grow your business, you may purposely get in a little over your head. If you want to make a leap from small projects to big ones, you’ll need to devote some of your dollars to ramping up. To throw your name in the hat for a new type of contract, you may need more personnel or employees with different skills. There may be equipment or security requirements that’ll cut into your cash. This kind of spending is certainly considered an investment in your business; still, spending money to make money is another common cause of cash flow gaps.
So, what can you do to avoid cash flow gaps?
The first thing you can do is to bill promptly – as soon as you’ve delivered your product or service. Get that invoice into the hands of accounts payable stat, and you’re more likely to receive checks sooner.
Also, be sure to include a payment due date on your bill. Some companies prioritize bills by due date, so get yours near the top of the pile by asking to be paid in 15 days, for example.
Some small businesses offer an early-pay discount of 1 to 3 percent if a check is received in 10 or 15 days. Not all companies take advantage of such an offer but it can’t hurt to point it out. Larger companies are more likely to expedite your check if there are potential savings offered.
If that still doesn’t work, consider getting a working capital loan or line of credit to help you even out the cash flow ebb and flow. Having a cash reserve to turn to can help ensure you always have product available to sell, or workers on hand to provide a service.
How can you get out of a cash flow gap?
You already know you want to avoid cash flow gaps when possible. But if, despite your best efforts, you’ve ended up in the midst of a cash flow gap, here are some possible remedies:
- Talk to your suppliers about extending your payment due date, to reduce the pressure you’re feeling to come up with cash you don’t have.
- Contact clients and ask if they can pay you immediately via credit card.
- Apply for a loan from a small business lender, to get that working capital reserve in place.
- Look into factoring, which involves selling your overdue bills for a fraction of their worth. It’s an expensive alternative, but it can yield quick cash.
Nearly all small businesses face cash flow gaps at some point. It’s a reality–and often, it’s for a good cause: growing your business. The more you can do to prepare for the next one, the less of an impact any gap will have on your operations.