Grupeer’s mission is to bring a high return to our investors, but also to help small and medium businesses grow. The Second part is fulfilled by placing business loan deals on our p2p platform. While working with our loan originators we have understood that many small businesses or entrepreneurs face a lot of cash flow challenges, despite their great ideas. Usually, our loan originators try to help to solve the cash-flow problems, but there are tips on how to succeed for first-time entrepreneurs.
You will learn the important takeaways written in our Guest Blogging article by Patrick Hogan is the CEO of Handle.com, where they build software that helps contractors, subcontractors, and material suppliers with late payments. Handle.com also provides funding for construction businesses in the form of invoice factoring, material supply trade credit, and mechanics lien purchasing.
3 Cash Flow Tips That First-Time Entrepreneurs Need to Know
If there’s one thing that first-time entrepreneurs need to learn, it is that cash flow is king. Cash is the lifeblood of any business. Generating a lot of sales revenue and having high profits on paper doesn’t mean anything if you have low or even negative cash flow. Without cash, you will have a difficult time growing your business from the start-up stage to the growth stage.
According to the Small Business Administration, around 20 percent of businesses fail in the first year. And the biggest reason why they fail? Around 82% experience cash flow problems and around 29% simply run out of cash. Starting a business is risky, but having a firm grasp on your cash flow ensures the longevity of your operations. Here are some cash flow tips that first-time entrepreneurs need to know.
1. Create a budget and stick to it.
Creating a budget is time-consuming but like it or not, it should be one of the crucial things you need to do to protect your cash flow. A budget serves as a guide, especially if you are working with tight numbers. It lets you prioritize some expenses over others, putting everything into perspective and letting you see their costs versus the value they provide to your business. Take note that not all expenses are equal. Engaging in impulsive spending, especially on things that do not benefit your business at all, will have a negative impact on your cash flow.
Creating a budget is easy. It involves tracking your revenue, analyzing your expenses, and putting your cash where it is needed. The hard part is actually sticking to it. First, set realistic numbers for your budget. Ideally, your budget should be based on your cash flow, then make conservative projections based on the trends you identified.
Next, include a cash cushion for emergency expenses. If you are too rigid with how you spend your cash, you will not be able to address the needs and opportunities that may arise in the future.
Finally, always revisit your budget and update it based on your current situation. If there is a change in your business performance or expenses, revise the numbers accordingly.
2. Vet potential clients before extending credit.
As a business owner, you want to make it easier for customers to purchase your products and services. One way to do this is to extend credit aside from cash. However, there will always be a risk of nonpayment every time you do so.
Part of cash flow management is minimizing the risk of bad debts. There are plenty of approaches you can employ to reduce this risk but the most important is being selective of clients and checking their credit history before closing the deal.
First-time entrepreneurs may scoff at the idea of turning away customers. After all, we all need all the business we can get. However, you will be freeing yourself from headaches in the future if you turn down a potential client with less-than-stellar credit history. But if you really want to have them as clients, you can minimize potential losses by having a higher upfront deposit and tightening your credit terms.
3. Be proactive in collecting receivables.
The subject of payment collection tends to be intimidating and awkward for first-time entrepreneurs. Contacting customers to ask for payment is uncomfortable and some people don’t want to do it. But this is a costly mistake.
Don’t be passive in collecting receivables. The more time passes after an invoice is due, the harder it is to get hold of a customer and collect payment. To improve your accounts receivable collection, you need to have several strategies in place that encourage on-time payment.
First, when you are discussing payment terms at the start of a deal, both you and the client should be on the same page about payment deadlines, amount, and methods. This prevents delays due to inaccurate invoice information. Next, impose late penalties for late payment. Something along the line of a 5% penalty for invoices over 5 days due will encourage clients to pay on time. Finally, send gentle reminders about the penalties they will face for late payments. Be polite yet firm in your further communication if the bill is way past due.
Even with high sales and steady growth, your business operations can be hampered by cash flow issues. If not addressed, these cash flow issues will threaten the existence of your business. Cash flow issues are some of the biggest reasons why new businesses fail, but as long as you have strategies in place to control your expenses and improve your receivables collection, you can avoid being a part of this unfortunate statistic.