Written By: Gerry Fusco, VP Business Banking Manager, Union Savings Bank
Understanding and maintaining a steady cash flow within your small business is vital to the health of your business – not to mention your own. No one wants to be up at night worrying if you’ll make payroll this week, or if you’ll be able to absorb costly equipment repair bills during the high season.
This is why cash flow within your small business needs to be carefully tracked not only month to month, but year to year. Generally speaking, you probably have a good idea of how your business operates; knowing when you are cash-rich and when you are cash poor. For example, if you are a landscaping contractor, the majority of your business comes during the warmer months but drops off significantly during the colder ones. Or if you are a company that builds complicated machinery, you may spend nine months building the machine – paying out vendors all the while – and not get paid until you deliver the machine. On the other hand, operating a restaurant is more or less a cash-in/cash-out business; you get paid immediately for the food you sell, and you pay suppliers on a short cycle.
No matter your business, the first thing to clearly understand is how money cycles through your business – and how you’ll bridge the natural gaps created by the kind of business you’re in. Knowing the intricacies and timings of your payables and receivables is critical to success – and survival.
So how does your business manage cash flow through the ups and downs? Do you maintain a cash cushion – drawing it down during slow months and building it up during your high season? Or do you maintain a line of credit with your local bank – drawing on it as needed and paying down the balance as cash rolls in? The longer and more unpredictable your business cycle, the more critical it is to have a plan in place for solid cash flow throughout.
Invest Your Cash Cushion
If you are among those fortunate enough to have a large cash cushion on hand – and the discipline to keep it on hand for slower months – you’ll want to have that cash working as hard as it can for you. Your local bank can offer several options that can work for you – offering interest on your balance while maintaining the liquidity you need. If your surplus cash is more than you’ll need over the course of the business cycle, you might consider making an investment in your business – like buying a building rather than renting space or purchasing equipment that can make you more productive. Again, your local bank can help you work out a financing package that works for you.
Get a Business Line of Credit
For those of us who do not operate with a cash cushion, it’s practical to have a business line of credit available to access as needed. Small businesses have long used business lines of credit to responsibly bridge the gaps in their cash flow – drawing down and replenishing as needed. Of course, the best time to work with your local bank for a line of credit is before you need it. Having it in place before the vendor invoices – or worse, payroll obligations – pile up will provide peace of mind as your business cycles through its ups and downs. With a line of credit available, you’ll also be able to take advantage of discount opportunities on needed inventory. Often, lower prices are available during the off-season, when suppliers might be experiencing cash flow issues of their own.
Hire an Accountant or Bookkeeper
Chances are you did not get into the business you’re in to carefully manage cash flows – unless your business is actually an accounting firm. And chances are also that managing cash flow is not what you’d like to be doing in between the tasks that keep your business running smoothly. This is why many small businesses – even single-person entities – often employ the services of a bookkeeper or an accountant to help run their books.
Many small businesses, especially lean start-up businesses, tend to think they can do it all in hopes of saving money but in the long run, are better served by having an expert available. Whether you need a staff controller or a part-time bookkeeper it’s important to think of their costs not as money going out the door but a valuable resource that creates value by tracking and managing cash flows efficiently.
Working with an accountant or a bookkeeper can also come in handy when it comes to preparing financial statements to share with your local bank when establishing a relationship. The right bank can become a consultant to your business in many ways: they know the local market and its economic trends, they will take time to understand your business and the cycle of your business, they can help you clarify your financing needs and present solutions you may not have considered, and most importantly, can help you anticipate your needs.
So there you have it. If you have a small business, you have a cash flow that demands understanding and careful management. And having a team of professionals behind you – including those you’ll find with your local bank – can help you through the ups and downs.
To learn how cash flow management tools and services from Union Savings Bank can help your small business, contact our Business Banking team.