Cash management tips for small businesses

US-PDGov

Are you flabbergasted witnessing relatively handsome profits on paper but less cash flow in reality? The stark discrepancy in the accounts might be a result of inefficacious cash management which, if overlooked might land your business on the rocks.

Ineffective management of cash in a small business is not seen with a favorable eye by investors, who would obviously not want to invest in a company, which has no stability. Hence, to keep your company viable, it is imperative to learn the ways of managing cash efficiently so that the cash not invested on any fixed inventories is available to you in optimum amounts at any given point of time. Here are a few tips on managing your cash flow effectively. 

Timely payment – One of the biggest causes of small businesses going bankrupt is customers not paying on time. To ensure that your customers are not delaying your business deals, you require to be on your toes to prepare and send your invoice as soon as the goods are delivered to your customers. A mention of penalty charges in case of payment received post due date can speed up the process. 

Laying off or tightening credit for customers- When your customers fail to pay you on time, you too get delayed in paying off your suppliers and a vicious circle is created. In order to ensure that your working capital is managed effectively it is required at times, to lay off certain customers who have not paid dues for a considerably long time or to restrict credit lines for those who have been constantly delaying payments. Of course, you cannot take such a step suddenly and it is essential to analyze the history of payment of the customers on grounds such as how many days or months they are behind, whether they have paid the full balances after a lapse of the due date and the likes. 

Analyzing new customers- While keeping a track of your old customers you cannot simply rely on the new ones that you are getting linked with. Therefore, if your customer is asking for goods on credit it is important to check into their financial background and past credit records. It is also advisable to refrain from sending further orders till the time the past dues are cleared. If your customer is unable to pay the whole amount, try to convince them to pay in installments. 

Managing taxes- Business entrepreneurs are often seen burdened with too many taxes and if you too are facing such a situation, it is time that you sit to discuss ways of optimizing tax outflows with your attorney. 

Managing communication and inventory costs- Doing away with too much money spent on communication in the form of telephone bills is an equally important thing in cash management. Instead of splurging on phone and mobile bills, resort to Voice Over Internet Protocol or VOIP systems as an option for effective and inexpensive means of communication. In case of inventories, do not order more than is required, while attenuating on the quantities of those, which are not selling frequently. 

Finally, growing the surplus cash either by creating a savings account or by investing it in some other way is a sure way to boost your business by efficacious cash management.

Disadvantages of small business loans

The disadvantages of small business loans aren't always made clear by lenders who may collect lending interest regardless of whether or not a small business fails. Between 2006-2008 business bankruptcies rose from 19,695 to 43,546 according to the American Bankruptcy Institute (ABI). 

Included in those bankruptcies are the approximately 50% of small businesses that are reported to fail within the first 5 years of operation by the U.S. Small Business Administration website (sba.gov). Some of the disadvantages of a small business loan can include 1) loan objective failure, 2) cost of the loan, 3) affect on business credit rating and 4) implication to shareholders.

• Impact on business credit

Creditors use total credit used in relation to total available credit in calculating credit scores. If this ratio is too high it could negatively affect future financing activities for the business. For example, if a line of credit or business credit cards are used to sustain daily operations during the cash conversion cycle and to facilitate accrual accounting, that credit may be negatively impacted by a business loan for another project. When obtaining a small business loan it is a good idea to assess any potential financial impact on other loans or credit.

• Loan non-performance

Small business loans can and do have pitfalls or disadvantages. The business plan which was used to obtain the loan could fail making the cost of the loan higher than the rate of return on the loan. Consumer trends can dip, cyclical markets may stay in downturns, and a long drawn out secular market may lead to potentially unsustainable leverage for a small business. In other words, it may be a good idea to build in a reasonable amount of cash flow redundancy into a small business in case forecasts and otherwise consistent projections do fall short.

• Cost of loan

Some loans simply are too expensive to be beneficial even if the loan is considered a calculated bridge to a future financial or business goal. This is especially the case with unsecured loans or small business loans with fiscally oppressive terms of agreement. A loan cost that exceeds the return on debt is usually a risky decision unless the loan is implemented in a solid two-step forecast. For example, a seasonal loan that allows a retail business to stock up inventory for the up season or continue operations during the down season.

• Implications to shareholders

If the small business has shareholders, the shareholders may be displeased if directors and officers poorly acquire and implement business loan activities. The displeasure of shareholders could have negative consequences to the equity positions within the business or the roles of directors in the business. Some loans may take a complete business cycle to have its desired impact in which case strong reasoning and evidence for the loan may be useful in regard to discussion with shareholders.

• Faulty risk assessment

If a lending bank is insured against loan defaults they may only apply the minimum risk assessments required to issue a loan and secure debt which may simultaneously increase the risk of loan assessments made by small businesses. This is especially the case for unsecured loans. Unsecured loans don't require collateral, have high interest rates, aren't always offered with borrower scrutiny and are generally higher risk. If a secured loan is risky for a small business, then an unsecured loan may not always be a good choice.

In summary, small business loans have potential disadvantages as well as real disadvantages. The differences between potential disadvantages and real disadvantages are their financial actuality such as cost, and credit impact whereas potential disadvantages may include leveraging of a failing business and loss of shareholder confidence and equity. 

Small business loans vary in risk that make the riskier loans more potentially disadvantageous than low risk loans. However, even with low risk loans, there may be way to finance business projects and operations in a more effective way. Adequate inventory control, reorganization, internal audits, business strategy adjustment ext. may all contribute to less need for debt and a more profitable and functional business.