Small business: Managing cash flow, it's do or die

Generating sufficient cash flow is always a challenge for small businesses, but it's particularly so in this economy.

Customers are paying invoices slowly, costs are rising and revenue growth is still sluggish.

That means small businesses have to be even more savvy when it comes to planning their cash flow strategies or risk closing their doors, say experts.

"You could have all the sales in the world on paper, but if you don't have the money to pay your bills, you're out of business," says Janet Attard of BusinessKnowHow.com, a Centereach-based small-business information website.

To avoid this fate, you must take proactive measures. Here are some suggestions to help get you started:

1. Prioritize. Your cash flow problems aren't going to fix themselves, says Caroline Jordan of CashFlowRollerCoaster.com and author of "Stop the Cash Flow Roller Coaster, I Want to Get Off!" (iUniverse; $16.95). You have to make it a priority, says Jordan. "Every single decision that's made in a business has to be focused on what it's going to do to cash flow," she says.

2. Get educated. Understand the economics of your business and what's required from a working capital perspective, says Mike Rellihan, associate principal at REL, the working capital management division of the Hackett Group in Atlanta. Manage the cash gap, which he defines as "inventory plus receivables minus the payables." To reduce the cash gap, stretch out payment terms on the purchase of inventory where possible, shorten the collection period on receivables and reduce inventory to make sure its turnover is at a higher level to reduce the risk of obsolescence, Rellihan said.

3. Tighten up collections. To shorten the collection period, you need a strong collection process or you risk running into a cash crunch, Jordan said. Steve Free, owner of The Bug Stops Here, an extermination company in Bohemia, learned this the hard way about a decade ago. He was so busy running his business that at one point he had more than $50,000 in outstanding invoices. "I wasn't watching the ball," says Free, noting this isn't the case now. The company is more diligent on following up on overdue invoices, including reminding customers when they make appointments. If the bill lags into the fourth month, we stop service, says Free.

4. Segregate. Review your list of vendors and prioritize which of them you have to pay to stay in business, suggests Jordan. Break them down into A, B and C payables, with A ranking highest on the must-get-paid list. "It's a matter of taking the few resources you have and using them wisely," she says.

5. Be flexible. That applies to the forms of payment you accept, including mobilizing your credit card processing capabilities so you can accept payments on the job site, suggests Attard, who offers more tips at BusinessKnowHow.com. Consider also accepting ACH (Automated Clearing House) electronic payments directly to your bank account, says Attard. If you're concerned about releasing banking information, consider establishing a separate account to accept these ACH payments and leave limited cash in it to limit risk, suggests Attard.

6. Renegotiate. Review vendor relationships and see if there are ways to negotiate better terms. This includes extending payment terms where you may have leverage, says Rellihan. "You must analyze everything," adds Free, who reviewed his corporate car insurance coverage to discover he was overpaying on an older vehicle because the insurance company had a driver with tickets listed on the policy even though he'd been terminated three years prior. "By making one phone call our insurance went down $1,000 a month," says Free. 

Fast fact: According to the latest Wells Fargo/Gallup Small Business Index survey, 38 percent of respondents rated their company's cash flow as very or somewhat good for the second quarter of 2011, down from 43 percent in the first quarter. Additionally, 38 percent rated cash flow as very or somewhat poor, up from 33 percent in the first quarter.