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Cash flow seems to be one of the most common buzzwords that dominate the entrepreneurial conversation — and with good reason. Poor cash flow management is the reason why 82% of small businesses fail. This can be a scary statistic for most entrepreneurs, especially when your business is small and one major financial emergency away from bankruptcy.
With rising costs over the last two years, maintaining a healthy cash flow is becoming more difficult. In 2023, more than 10% of small businesses relied on credit cards to provide emergency cash every single month. In addition, over 75% of small businesses admitted that they’ve exhausted more than 30% of their credit card limit. This trend is expected to continue as inflation, technology disruption and supply chain challenges continue to impact the global economy.
The problem is that focusing too much on cash flow is shortsighted. Most cash flow is monitored on a weekly, monthly or quarterly basis. To be successful, entrepreneurs need to think beyond cash flow and consider a long-term cash planning strategy. In contrast, long-term cash planning involves forecasting and managing cash flow over an extended period of time, often spanning multiple years.
Here are some easy ways to implement a long-term cash planning strategy today.
Related: 6 Strategies for Optimizing Cash Management When Starting a Business
1. Establish cash reserves and working capital
For small business owners, financial emergencies can arise at any moment. It’s critical to have a small amount of cash available for these situations. Most financial experts recommend that small businesses carry enough cash to cover three to six months of operating expenses. In addition to cash reserves for emergencies, you should also plan to have enough working capital available in the event that you get a large contract or delays in accounts receivable.
2. Capital expenditure planning
Small businesses may need to put efforts into capital expenditure planning to ensure they are reinvesting their profits appropriately back into the business. Capital expenditures can include buying a new building, remodeling an office, buying company vehicles or replacing a piece of equipment. Carefully planning your investments into the business can support your long-term growth strategies and minimize unexpected costs from old and broken equipment.
3. Embrace diversification
Industries, technology, regulatory requirements and consumer behavior are always changing. It’s important for entrepreneurs to consider the many variables that could affect their business’s ability to generate revenue and stay in operation. By creating a plan to navigate these potential challenges, small businesses can help protect their revenue and stabilize their long-term cash flow.
One of the best ways to mitigate risk is by diversifying your company’s revenue streams. Diversifying revenue can come in many forms, including adding new products or selling to customers in a new demographic. This ensures that there is always healthy cash coming into the business even if one product or service stops performing.
Related: 3 Cash-Management Strategies for Improving Cash Flow Issues and Optimizing Efficiency
4. Refresh your accounts receivable and payable processes
Accounts receivable and payable are the core drivers that keep money flowing through your business. Entrepreneurs can improve their AR and AP processes by renegotiating payment terms, capturing discounts for early payment, offering easier payment methods and properly staffing their collections team. These changes can not only improve cash flow, but they can also reduce overall operating costs and improve customer and vendor relationships.
5. Focus on cost optimization
Businesses that have been operating for a while tend to fall victim to cost creep. Over time, operating costs increase as new systems are implemented, vendors raise prices, raw materials become more expensive and labor rates rise. It’s important to periodically review your operating costs to make sure they aren’t overinflated. This may also involve working to streamline internal processes that have become overly complex or cumbersome. By optimizing your operating costs, you can increase positive cash flow and maintain a healthier bottom line.
6. Don’t forget about tax planning
Taxes — every business owner’s favorite subject. As much as business owners would like to avoid the topic altogether, it’s critical that entrepreneurs have a robust tax planning strategy. The good news is that business owners don’t have to be tax experts. By regularly reviewing tax projections from a qualified CPA or tax professional, business owners can avoid large, unexpected tax bills that can disrupt the company’s cash reserves.
In summary, entrepreneurs need to understand the critical importance of cash flow management, a factor often linked to the high failure rate of businesses. With recent economic challenges, such as inflation and supply chain disruptions, businesses are increasingly relying on credit, creating a precarious financial situation. Short-term cash flow monitoring is insufficient for long-term success.
Instead, entrepreneurs must have a comprehensive long-term cash planning strategy. This includes establishing cash reserves to cover operational costs for three to six months, engaging in thoughtful capital expenditure planning, diversifying revenue streams to adapt to market changes, refining accounts receivable and payable processes, focusing on cost optimization to combat creeping expenses and implementing robust tax planning. These strategies aim to provide a stable financial foundation, enabling small businesses to navigate the complexities of the modern economic landscape effectively.