When Matthew Ross’s online business ran into cash flow issues, he and his team got creative. Ross is the co-founder and COO of the mattress review website the Slumber Yard, a company that largely runs on affiliate marketing. The Slumber Yard publishes reviews of mattresses and partners with retailers that sell them, providing affiliate links on the site. When a reader makes a purchase through the affiliate link, the Slumber Yard earns a referral fee from the retailer.
However, many new mattress companies offer 100-night trial periods, during which customers can return the products at no cost. The Slumber Yard only gets compensated for referring customers who fully convert, so many of its partners don’t pay until after the trial period has ended.
With expenses to cover and employees to pay, Ross knew payment periods of 150-200 days were unsustainable. “We’ve had to kind of get creative on how to get these (partners) to pay a little quicker,” he said. “One of the ways we’ve done that is, with certain partners, we’ve struck agreements where maybe we’ll give them a slight discount if they forego the sleep trial and pay us sooner, so that’s a win-win for both parties.”
The company has also offered discounts and promotions to encourage faster turnarounds on invoices. Not all partners have gone for the offers, Ross said, often because of their own internal processes. But getting even a few to pay sooner improves cash flow.
While incentivizing earlier payments isn’t an option for all small businesses, it’s worth considering how you can improve your situation. Eighty-two percent of companies fail because of cash flow struggles. Without working capital on hand, it’s difficult to meet monthly expense obligations, make payroll and maintain inventory.
Of course, it’s not just a matter of having cash on hand. There are several challenges associated with this aspect of business management, cash flow projection being chief among them, according to Jay Singer, senior vice president of Global Small Business Segment at Mastercard.
Singer said simply understanding cash flow management and projection is a challenge in and of itself for small business entrepreneurs. “Small business owners often lack cash flow management systems that are simple and easy to use, and many aren’t professionally trained in accounting and finance,” he said. “They’re continuing to expend a great deal of energy trying to educate themselves on how to manage their cash flow, which takes precious time away from practicing their craft.”
Cash flow is integral to business management; you can’t run a company without working capital. So how do you make it easier and more efficient? Singer predicted a shift toward digital and automated tools that can assist with cash flow projection and invoice management. Services such as QuickBooks and Scoro include cash management tools with their business software, so you can access multiple forms of financial management in one program. Google Docs offers free cash flow management templates as well. Fortunately, a broad range of solutions exist that will suit different small businesses' budgets and current cash flow needs.
“Increasingly, we’re seeing an interest in digital tools as well as artificial intelligence (AI) among small business owners,” Singer said. “As new and different options for cash flow management solutions come into play in the next several years, these capabilities will likely become even more important.”
If offering discounts and other incentives for faster payments isn’t an option for your company, you’ll likely need to look for other capital sources to cover the gaps. Wai-Chun Li, senior vice president of the Small Business Lending Department at East West Bank, suggested drawing on personal savings if possible or applying for a small business loan from a local bank. He also said he’s seen an increase in co-funding, in which you work with family members, friends, or other investors to cover the business’s needs.
“Co-funding can be an attractive alternative to taking out a bank loan, especially if you’re hoping to avoid interest. However, you will need to share the profits with your investors and co-funders, and that could be costlier than taking out a loan.”
Co-funding can be an attractive alternative to taking out a bank loan, especially if you’re hoping to avoid interest, Li said. However, you will need to share the profits with your investors and co-funders, and that could be costlier than taking out a loan. He recommended that businesses consider how much they are likely to pay the bank versus how much they anticipate earning in profits, and then determine how much they’ll pay out to their co-funders. In the long run, it may ultimately be more advantageous to take the bank loan, even with interest.
“The lender likes to see the track record of the business,” Li said. “They want to see the financial history, they want to see how they’ve been performing.” Importantly, the lender will also want to see documentation of your current cash flow processes and projections. According to Li, they’ll look at your earnings before factors such as interest, taxes and appreciation.
“Cash flow (indicates) how fast they can generate business and pay back the bank loan,” he said.
While cash flow is vital to all businesses, the right solutions will depend on your company’s unique needs. “Startups or growing businesses generally need more cash to support their development and cover expenses (e.g., inventory, infrastructure and employees) compared to more established businesses,” Singer said. “The type of business is also key. Factors such as seasonality and weather are impactful, and having cash is critical with labor-intensive businesses.”
Singer said that in fields such as agriculture or manufacturing, securing short-term financing via a line of credit or credit card can help bridge the gap between receiving payments.
Financial planning also plays a role in managing your cash flow. Creating a reserve to cover gaps between payments will prevent disruptions in the business, as well as creating a careful budget and clear systems for documenting income and expenses. Make sure your projections account for expenses down the road as well, including yearly bills or payments. The more meticulous you are in your accounting, the less likely you are to be caught off guard if there are long periods between receiving payments.