Small Business Lessons: Manage Cash Flow or Perish
[This guest post comes from serial entrepreneur and speaker Elaine Love.]
Cash flow management is essential, especially to a small business. As a start-up or small business, the number of income streams may be more limited. When something unexpected interrupts one of those few income streams, the results can be disastrous.
Causes of cash flow problems
Seasonal businesses are vulnerable to cash flow shortages because of the hot and cold nature of their income. If a ski resort does not have enough snow, the tourists will cancel their reservations; if there’s a hurricane, the beach-goers will do the same.
Every tourist location is occasionally at the whim of Mother Nature. Miss out on income from your prime season, and you can be in financial trouble. Below are a few tips on how to help your small business weather your financial lows.
Become a “what if” specialist
Don’t spend it all. Money flows into your bank account during your prime season; plan ahead. One of the most common problems for a new entrepreneur was to “live it up” and spend generously while the money was flowing in from a good season. In April when the ski mountain closed, the bank account was happy. Without careful planning, the coffers were soon bare.
- Calculate the amount for rent, utilities, employee wages and taxes, and miscellaneous expenses needed for each month of the year.
- Calculate the anticipated income for each month. In the case of Mountain Castles property management in a ski resort, December through March income had to cover twelve months expenses.
- What if it is a bad snow year? Income will be seriously diminished. Now you need to be able to cover 20 months expenses and hope that you do not have two bad snow seasons in a row.
Cash Flow Strategies
- Saving money and investing it in as high an interest account as possible as long as you have access to withdraw funds as needed throughout the year.
- Line of Credit can be useful if you have the funds invested in a high yield account which does not allow withdrawals. As long as the interest rate earned is higher than the interest rate paid on the line of credit loan, this can be an effective solution. Pay it back as quickly as possible to reduce the interest expense.
- Creative purchase terms may allow you to purchase supplies now and pay in 60 days instead of 30.
- Revenue-based financing (RBF) is an option if you have a track record of anticipated income and the previous options have not proved viable. Extreme caution is advised any time you negotiate a loan based on a percentage of your future revenues.
- Short term bank loans are always alternatives.
The major key is to know your anticipated expenses and anticipated income. Plan ahead for “what if.”
Develop additional income streams which flow with your primary business. In the case of Mountain Castles property management, we handled yearly rentals, monthly maintenance fees for the vacation rental homes, and monthly fees for non-rental homes; all of these generated steady twelve-month income. We also offered a redecorating and maintenance services.
The key to additional revenue streams is being certain they tie to the main purpose of your business.
Manage the income with the anticipation of future expenses. Create additional streams of income to offset the temporary disruption of one income stream.
About the Author:
As a serial entrepreneur, Elaine Love has experienced the challenges and success of small businesses. One of her entrepreneurial endeavors expanded her 1986 controversial idea to a corporation of over 50 employees. Mountain Castles earned the First Resort International “Innovator of the Year” award in 1997.