There are a lot of factors that contribute to building a successful business, from having the right people in the team to having the perfect business model that matches your company’s vision and mission. While these business aspects are all interconnected, some factors need to be prioritized, including getting funds to scale your business.
In the industry, managing cash flow is crucial in making sure that your entrepreneurial venture not only survives but also thrives in today’s cutthroat market. According to Business Insider, while there are various reasons attributed to closure, 82% of small businesses fail because of poor cash flow management.
What is cash flow, anyway? Cash flow represents how the money moves in and out of your business every month, representing all the transactions reflected in your business account.
The flow is usually thought of as simply outwards, in the form of expenses like employee salaries, tax and loan payments, rent and other operational costs, and employee salaries. But it actually flows both ways, as cash comes in in the form of payments from clients and customers when they complete their transactions with your business.
Before diving into maximizing your cash flow, let’s first explore the available financing options to support your business’ cash flow—because there are more options than taking out a loan from traditional banks.
Venture Capitalist (VC)
A venture capitalist is often a company that provides startups and small business ventures with the needed funding to either support in founding the company or expanding the business further. But these VCs don’t just invest in any company—they finance ventures that they consider to have high growth potential as they’re expecting to earn a high return on investments once the company scales.
The benefits of having a VC to back your small business up extends beyond financial gains. VCs often can add value to your company and provide an avenue for you to connect with more experienced entrepreneurs and industry experts to give essential advice and insights into growing your venture.
An angel investor is a high-net-worth individual who invests his/her money in a newly-established or small business. Investors provide capital and often do so in exchange for equity—typically asking for a return of around 25% or higher. Angel investors are often attracted to invest in startups with a unique tech-driven idea as they hope to foster innovation and economic growth.
As the name suggests, partner financing is when big, established companies partner up with startups or small businesses and provide capital in exchange for equity sale, royalties, or special access to their product or service. This way, the partnership benefits both parties involved and allows both to grow together rather than against each other.
Crowdfunding is a financing method of raising money from multiple sources such as from friends, family, and various individual investors—pooling small investments to use as capital for your startup or small business. In tapping into a vast network of investors, crowdfunding allows for a more flexible fundraising option compared to other more traditional financing methods.
Maximizing and getting faster cash flow to grow your business
Collect deposits on large orders
Requiring a down payment or security deposit upfront from your customers or clients is a great way to prevent financial loss and maintain a positive cash flow. Collecting a down payment to confirm a purchase or order request is especially important when fulfilling a custom order as one-of-a-kind items are considered to have a limited sales value.
Offer discounts to customers for quick payment
Reward your customers and clients by developing a discount program while encouraging quick payments and ensure a faster return on investment. Similarly, you can incentivize early payments with significant discounts.
For example, if you’re in the business of selling appliances, you may offer a certain discount for cash or straight payments. This approach allows you to secure the payment as quickly as possible.
Encourage customers to pay on time with late payment fees and penalties
Applying late payment penalties and charges are standard practice for businesses to help encourage customers to pay on time. Although, when implementing this approach, make sure to be upfront and transparent about the terms to avoid conflicts with your customers.
Track your money, including savings and expenses
It is common for startup founders and small business owners to take on debt, especially during the first few years of establishment. Owing money is perfectly fine as long as you have a robust repayment plan. You can only develop an effective repayment plan by ensuring that you monitor your business expenses—so you don’t run the risk of missed payments and late fees.
You should also limit unnecessary cash outflow while paying your debt by making the necessary changes in your purchasing strategy. On top of that, keep an emergency fund should you hit a rough patch along the way to business growth.
Delay cash outflow
Similarly, it’s crucial to understand how to delay your business’ cash outflow to extend your runway. One of the easiest ways to carry out this approach is to control your desire to buy new equipment.
It can definitely be tempting to purchase new technology, especially when there’s a new model recently introduced to the market with both improved and new features. But remember that big, unnecessary expenses can potentially hurt your cash flow for months.
Don’t get carried away by great advertising—stick to your existing tools and equipment if there’s no real need to upgrade. However, if your equipment breaks down and is beyond repair, being financially smart with installment buying can go a long way to ensure that you’ll still maintain a positive cash flow.
Get Money Fast
When you have a positive cash flow—or you have enough money to pay for all your business expenses—then you’re on the right track. However, if you’re experiencing a negative cash flow where you are having trouble covering your monthly costs, then it’s time to take a step back and reevaluate.
So, which strategy of these are you exploring to ensure that you maximize and get faster cash flow?