You’re off the Ground, Now Stay in the Air!
Your new venture is finally off the ground—congratulations! But you’re not in the clear just yet; you still need to make sure you have enough cash on hand to keep your business running smoothly.
As your business grows, you will need to maintain positive working capital to fund a wide variety of initiatives, from product development to new market penetration. But precisely how much money will you need?
Established entrepreneurs can review their balance sheets to make an educated guess, but new small-business owners will need to use online tools, industry benchmarks, and common sense to estimate their working capital needs. Then comes the hard part: you’ve got to find the money and hold on to it.
Here are two tips to help your business improve cash flow, reduce expenses, and avoid unpleasant surprises.
Implement Payment Best Practices
If your billing habits are irregular, or if you regularly delay billing customers for any reason, then you are leaving money on the table. Invoice your clients immediately, and establish billing practices that reward early payment and penalize delinquency. How long are you willing to wait for payment? Is your payment window too wide? Many businesses now require that an invoice be satisfied within 15 or even 10 days, rather than 30.
Maintaining a large inventory can tie up a significant portion of your working capital. Rather than hoarding supplies, shift your small business to the so-called “just-in-time” model. Just-in-time is, well, just what it sounds like: you will process excess inventory, and time your subsequent orders to arrive precisely when you need them.
In order to implement an effective just-in-time system, you need to know your business back to front, inside and out. How many order do you fulfill within a given period of time? What amount of variation exists month-to-month or season-to-season? How reliable are your vendors?
Just-in-time inventory schedules free up working capital, but they also increase your dependence on third-party business partners: suppliers, bankers, vendors, and shipping companies. For that reason, it is always a good idea to maintain an emergency fund, and to create a back-up plan in case there are any disruptions in your supply line.