Managing the Cash Gap for Small Business Owners

In the small business world, even a temporary cash flow shortage can result in major problems. With razor-thin margins and the constant financial demand of running a business, it should come as no surprise that 29% of small businesses close due to running out of cash. A whopping 60% say that cash flow contributed in some way to their closing.

While it’s the frightening reality of being a small business owner, there are steps that you can take towards managing your cash gap. This helps you plan for the lean times and overcome potential pauses in your income.

Defining the Cash Gap

From the moment that you pay for your inventory until it’s sold, you’re dealing with a cash gap. In order to keep your small business open, this cash gap must be filled with either financing or your cash cushion that you’ve established.

These cash gaps can be exacerbated by any number of things, including drops in sales, an unexpected repair, customers that pay late on their invoice, and the seasonal nature of your business. When these expenses begin to compound on each other, real problems with cash flow begin. Small businesses often seek out short-term loans during these situations, but high interest rates and big payments can leave you strapped for funds.

Managing the Cash Gap

Creating a sustainable plan of action for dealing with your cash gap could save your business in a worst case scenario. Try these tips for establishing your cash gap solution:

Maintain a Cash Flow Statement Every Month

As with all financial planning, you must have a clear view of your monetary situation before you can start making major changes. Start with a cash flow statement at the end of each month. Keep track of how much money came into your business, how much was spent on your  business, and how much profit you had at the end of the month. This can help you understand where your major cash gaps might be in a month, and allow you to plan for those times.

Avoid Unpaid Invoices

Unpaid invoices for B2B sales is a major issue with small businesses, especially when those invoices are consistently late. The first step in avoiding this problem is getting familiar with the person who pays you within the other business. In doing so, you have a frontline resource to finding out what the problem is in case of delays.

You should also clearly establish when and how invoices will be paid. Many businesses nowadays forgo the paper check and opt for payments through an invoicing service or direct deposit. If that’s the case, set clear rules for when payments should be sent, keeping in mind weekends and holidays.

For example, a payment sent to your account on a Friday may not hit your account until Wednesday or Thursday of the next week, whereas a payment sent on a Monday could hit your account on Wednesday of the same week. Instead of setting a due date, consider a rule like “the last Monday of every month.” This can help ensure that you get your money in the most timely manner.

Create a Cash Cushion

It’s hard enough for a small business to pull a profit, and for some, the idea of establishing a savings account is laughable. That being said, it is an absolute necessity to have a rainy day fund for those times that something goes wrong. Even if it’s just a few thousand dollars, keeping cash aside can prevent you from seeking additional financing for something like an HVAC repair or a seasonal slump. It can also allow you to seek out investment opportunities that you would not have access to otherwise, such as special promotions on inventory that you typically purchase for full price or participation in a local marketing endeavor.

Being the owner of a small business is a rewarding and exciting experience, but a lot of frustration and fear can come with it.  Finding ways to manage the cash gap can help you reap the rewards of your business without the anxiety of worrying about how you’re going to pay your rent next month.