Cash Flow Management for a Small Business

Do you want to start a small business or are you a small business owner wanting to expand? Sure you are really good at day-to-day tasks and your craft but you lack experience running a business. How can you start or develop without risking losing it all? Do you know how to properly perform cash flow management?

Cash flow is the biggest issue for most people starting out who want to expand. Either you have money but don’t know how much you need or you have some, need more but you don’t know how much more or where it will come from.

We talked to Kyle Friedman about important factors in cash flow management and financing. Kyle is a successful entrepreneur and founder of multiple business ventures in Calgary, Alberta. From his experience developing businesses from the age of 18, he has learned useful tips and tricks you can consider for succeeding in your venture. Check out some of Kyle’s businesses listed at the bottom of this article, or catch our other interview with Kyle on our podcast, The Ambition Project.

First let’s consider that nest egg you may have. You have the intention of it developing your business into what you dream it to be. Your nest egg is sizeable, but is it enough and what do you want to use it to achieve?

Forecasting where to spend your capital

Kyle points out the importance of forecasting expenses and ensuring you can cover these in the allotted timeframe. In addition, you also need to able to endure expenses during unexpected occurrences. Some expenses include materials, employee wages and your own living costs. In his example, Kyle points out how a net 30 day billing period for you to your client can result in a net 60 day payment. If you bill your client after 30 days, it may be your next bill cycle or their pay cycle before you receive the payment thus putting financial strain on your business. That means you have completed 60 days of work before getting paid for the initial 30. This results in your continued expenses of materials and employees being doubled by day 60 and you are 30 days behind already. The bill you sent getting lost in the mail, a simple administration error etc. can result in you missing the pay cycle of your client and having to wait another 30 days. Now you are 90 days and your nest egg needs to cover materials and employee salary for a period of 90 days.

For this reason, Kyle recommends a minimum of a three month forecast of your financial requirements.

So you get offered another project which is great for your business but is it great for your finances? As expenses can build so quickly, taking on more work may only be plausible if you can fund up to 90 days of the project. Otherwise you could be drowning your business in debt.

Cash Flow Management changes with more customers

Kyle suggests managing cash flow for a current project is more important than getting more work. More work is great but only if you can fund it.

Here are a few of Kyle’s tips to managing cash flow:

As above, have a nest egg of forecasted expenses and ensure its enough.

Managing contract times can help by negotiating with suppliers and employees to a payment date that follows your payment date from the client. With regards to suppliers, they may even accept longer payment periods such as 60 days. Bi-weekly pay periods for employees can be a benefit or drawback. A 30 day late payment from the client means you only have to cover 2 weeks of salary out of your savings and not a full month. However, this is still two weeks from your funds and not from the payment received from the client.

Be careful during times of growth, growth is expensive, the cost of which may not be recouped for a lengthy period. Ensure you are stable in your current work and that it can be completed without the penalty of debts.

Sources of Capital for Business Expansion

So when it comes to debts, Kyle has some options to explore.

How about asking for money when you don’t need it. Lenders are more likely to lend to you when you have money than when you do not. Also, you could get access to that money at a lower interest rate due to the lower risk investment by the lender. Having that option set up means during times of poor cash flow when you wouldn’t be able to get lender support, you may already have the infrastructure in place to take advantage of it. A line of credit for example, may cost little or nothing until you use it. If you do use it, it can cost less than seeking finances from sources with higher penalties e.g. losses associated with RSPs.

Selling material possession, liquidating investments and maximizing credit cards can all be used to cover costs but be aware of the heavy penalties associated with each option.

Another option is called factoring. This is where you are owed money by a client and will be paid at a future date. Factoring is where a lender give you 85% of the invoice. This results in you losing a significant portion of your payment from the client as a fee to the lender, however, it is cash immediately and may get you through to your next billing cycle. Be aware that the expenses that payment would have paid still needs to be paid at that future date so ensure you have a plan for paying that expense also.

How much should you invest in Marketing?

Kyle believes in 2-10% of gross should be spent on marketing. Even in times of financial strain, your business is dependent on you getting work and you should never consider yourself above street level tasks, like knocking on doors. Marketing during a recession is the best time to market your business due to typically lower costs of ads etc.

Kyle takes a gorilla approach to marketing where he advertises to the local community in which he is currently working through several methods such as lawn signs, door hangars, placement of wrapped vans among other things.

In conclusion, it is clear that the many qualities of a successful business are learned through the experiences of the owner. This makes Kyle’s advice and recommendations invaluable for those who intend on starting out, improving or expanding their own business. Typically the best way to prevent small business cash flow problems is to adequately prepare for them and ensure you can cover at least three months of operating expenses.

See some of Kyle’s businesses: