While there are some signs of a “light at the end of the tunnel” in the COVID pandemic, business owners still need to be vigilant in protecting their livelihoods. There are still many unknowns, so it’s not the time to let your defenses down just yet.

Businesses across the nation have been affected differently depending on their state and their business type. Some states have shown a commitment to business support, being careful about controlling the spread of the virus while doing their best to keep the economy open. However, the fact remains that in addition to the risk of illness, COVID still poses major threats to your business today. 

One of the most fundamental things that differentiates businesses who have weathered the pandemic successfully from those who have struggled is their ability to manage cash flow.

Common Cash Flow Problems

Every business is met at some point with a cash crunch–currently the pandemic is the most widespread blow in recent years to the entire economy. Some of the most common problems businesses typically have with cash flow include:

A lack of cash reserves

According to a 2020 survey by Federal Reserve Banks, over 85% of business owners said they have had to take some type of action if they lost two months’ worth of revenue. Of those, 17% said it would mean they would have to close up shop.

When revenue drops, it’s vital that your business has about a six-month reserve to act as a buffer. One such example is the summer-specific businesses throughout the winter months, but forecasting cash flow is the best way you can see exactly how much money you should have set aside.

Too much borrowing

While debt can be vital to helping your business grow, having too much debt can seriously impede your cash flow. Taking out a business loan or opening a line of credit with a high-interest rate could eat up a lot of your revenue.

Oftentimes suppliers do offer financing which can alleviate short-term cash flow issues and help you avoid adding debt. Refinancing current loans for lower monthly payments or consolidating debt can also help you manage your borrowing.

Excessive discounting

While offering discounts can sometimes be a good way to keep loyal customers happy, selling your products or services at rock-bottom prices will shrink your margins fast. It can then be very difficult to raise prices back up later once you’ve “anchored” the lower price in the minds of your customers.

This is often a problem for small businesses that haven’t developed a good pricing strategy. It’s a good idea to review your expenses and current pricing to see if adjusting prices is a good idea. Sometimes, you may even need to discontinue a product or service that is not selling well, or that you can’t sell at a good margin due to low-priced competitors.

Other alternatives to discounting that great brands have used include:

  • Leverage “premiums” (adding a small free item to a purchase). The Sports Illustrated football phone is perhaps the most famous example, helping sell over a million new subscriptions. Premiums are great because they can provide a motivation to purchase similar to what a discount would accomplish, but without lowering customers’ expected price in the future
  • Launch new products at lower price points rather than discounting existing product lines. For example, the Lexus/Toyota, or Genesis/Hyundai brand splits allow those brands to offer both luxury and commodity vehicles that are priced independently.

Outstanding accounts receivable

Clients who aren’t paying on time can also crunch your cash flow. According to a 2020 survey by QuickBooks, small businesses saw over an 80% increase in late receivables from 2018 to 2019–for the businesses surveyed, the average amount of outstanding accounts was over $78,000. Having your cash flow tied up can put you in a difficult position. It may be a good time to review your current payment terms and policies to help prevent future invoices from creating cash flow havoc.

If you’re struggling with accounts receivable, you might consider adjusting your revenue model – for example, many businesses we work with at NMA are now running a subscription model where they bill customers monthly via a credit card rather than waiting for a check. These recurring revenue businesses are often considered more valuable by investors due to their predictable cash flows, and the fees associated with processing are very small relative to the opportunities and stability that this model creates.

Unstable growth

Growth is great, but it’s even greater when you have planned for it. Any growth that is not stable or well-planned can lead to cash flow issues. You can experience shortages if you expect growth that doesn’t come or when your expenses outweigh incoming working capital. If you’re experiencing a growth spurt, ensure you have a financial manager who fully understands the difference between cash flow and profits, and make sure you are carefully managing both.

Overstocked inventory

If you buy more inventory than you can sell, you could be left in a pinch. Inventory management systems can effectively help you balance your inventory levels. Keeping an eye on your inventory helps avoid getting too much or running out of your “best sellers.” Try to keep on hand just what you can sell in an allotted time to avoid a cash flow shortage. Taking the time to analyze buying patterns from your customers can pay off massively by helping you right-size your inventory.

Seasonal demand shifts

A lot of small businesses face fluctuations depending on the season. If you’re not accounting for these seasonal shifts, it can hit you where it hurts. It is important to project your cash flow and sales forecasts as accurately as possible to plan for seasonal shifts.

Bad bookkeeping or incorrect forecasting

Tracking your cash flow or forecasting sales when you’re small can be simple whether you utilize a personal accountant or perform your bookkeeping. However, as you continue to grow, you might reach a point when managing your cash flow and reserves becomes a bit more complex. Over half of business owners aren’t sure of their cash outlay each month or how much is deposited into their accounts on a monthly basis. Having a “flying blind” strategy will not serve you well. If you struggle with managing cash flow, there are options. You can upgrade to a better accounting system, implement cash flow management tools, or hire an accountant or bookkeeper.

How states are addressing the needs of businesses

Businesses across the nation have felt the brunt of the pandemic. Many states have stepped up in a variety of ways that include:

  • Direct funding to small businesses in the form of Coronavirus relief support that targets specific industries, for businesses in the midst of pivoting to stay afloat, and more.
  • Support for employees of small businesses, such as those who have been out of work, are just returning to work, have been forced to quarantine, or worked in hazardous conditions. Some programs are directed toward small business owners with employees to avert layoffs that might otherwise be necessary.
  • Support for communities, such as local development strategies that support small businesses, grants for broadband access, and to promote resilience and confidence in marketplaces as a whole.
  • Business-specific strategies, such as rewards for data-driven plans, liability protection, technical assistance, and more.

With the proliferation of these programs, it is easy to overlook opportunities. We often talk to business owners and groups who are unaware of specific programs that could help them. Connect with your local Chamber of Commerce and talk to other business leaders in your community as well to make sure you know all the available resources.

7 Ways You Can Protect Cash Flow and Build Up Your Reserves

Of course your best bet to avoid cash flow issues and keep your reserves boosted is not to develop a dependence on public programs such as those listed above. Seven great ways you can protect your cash flow and keep some money tucked away are:

  • Create a budget– Review overhead, make cuts where you can, and put your budget on a stress test–hypothetically, of course. Run the numbers for a potential good month and a bad month. Go a step further and categorize what you spend and see what stands out. Does your cash flow distribution make sense?
  • Have a Plan B– Even the smartest business owner needs a backup plan for a bad month or two. For instance, NMA partner Fundomate offers temporary loans to help small businesses experiencing a short-term squeeze. As an NMA member, you can access Fundomate for a great price.
  • Create benchmarks– How do other businesses allocate their spending? Look at these benchmarks and strive to spend similarly. Think of businesses in your same industry and businesses that have been open as long as yours. This doesn’t mean that if you’re a shoe designer, that you have to match spending with Nike–but it does mean you should adjust your spending accordingly based on your specific cash flow.
  • Don’t stop marketing– When you experience a crunch, the first thing you might think to cut is your marketing budget–but that’s like cutting off the hand that feeds you. Consider a tool like Business Warrior, another NMA partner, to help you fill those gaps in your marketing budget so you don’t lose your footing.
  • Manage your money closely– You’ve maybe heard the old adage “It takes money to make money.” While this is true to some extent, new business owners and entrepreneurs tend to take this a bit too literally and overspend their first few months after opening. Remember, not every expense is equal–or necessary. Every dollar spent takes away from your profit margins. It is important, especially if you’re a brand new business owner, to take it easy and consider the pros and cons of every expense.
  • Forecast– Forecasting is one of the most important things you can do to keep a finger on the pulse of your cash flow. You probably want your business to one day grow larger than it is today–detailed forecasting helps ensure you tackle that growth sustainably and efficiently. Forecasts also help you better understand your benchmarks (see above) and when the right time is to bring in additional resources. It eliminates much of the guesswork and helps you build a more strategic plan.
  • Focus on your partnerships– It’s good to have partners that have your back. Vendors, clients, other business owners– consider all the partnerships you have. At National Merchants Association, you have a partner that always has your back. Our whole business is built on supporting our members and putting them first. We are also a small business advocacy group and we fiercely lobby for small businesses at the local and national levels to ensure your success.

 

Final Thoughts

NMA has pledged to do our part to help small businesses get through these trying times by providing free credit card processing for three months for new card-present merchants, as well as a free contactless payment terminal. You can keep processing payments while keeping your customers and employees safe. This can free up cash flow over your first three months with us that can go toward other important investments in your business.If you’re ready to get started with a free contactless payment terminal and three months of free credit card processing, contact us today!