How to Manage Cash Flow in a Home Business

For a home business, properly managing cash flow is vitally important to keeping your business up and running. Here are ways you can keep your cash flow positive.

Managing cash flow is just as important for a home business as it is for a Fortune 500, mega-huge business. Sure, you might have more of it as your business grows, but businesses that manage their cash properly will always have a leg up on businesses that do not. As the old cliché goes, it takes money to make money, and you don’t want to be caught without money to invest in the next big job.

But what does that look like? How do you manage your cash if you’re a home-based business that may not have a whole lot of cash to manage?

1. Get a deposit

Most business owners have a horror story or two of doing work for a client without first taking a deposit, only to see them walk away. Once that happens to you, you’ll understand the importance of the down payment.

But it serves another purpose, too. The down payment gives you the cash to invest into supplies for the job, paying outsourced labor, and reimbursing you for your time should the client try to default on the deal.

Write into your contract that the deposit is non-refundable — whether it’s a special order you place on behalf of a customer for a hard-to-find product or a service you’re offering — there’s no going back once you receive the deposit.

Some people who run product-based businesses ask for a deposit equal to the wholesale cost of the item or, at the very least, the cost of any restocking fee they would have to pay.

2. Get rid of excess inventory

If you hold inventory, know when it’s time to cut your losses. Hopefully, you won’t make too many purchasing mistakes, but the longer you hold the inventory, the less it’s worth. The shelf life depends on the type of item, but unload it before its value falls well below the wholesale cost. Sometimes, it’s better to take the loss but have the cash to invest in other, hotter-selling products.

3. Quick Payment Discounts

The bigger the client, the larger the potential for them to pay slowly. Slow payers are painful to your cash flow but you can’t risk making them mad by demanding payment by a certain time. Instead, offer them a discount for paying within a certain amount of time.

For smaller clients that are continual slow payees but maybe not large enough where losing them will substantially eat into your profits, institute late pay penalties. Just keep in mind that you may lose the customer when you turn the relationship into a negative.

4. Have multiple ways to pay

Gone are the days when you could only accept cash and avoid credit card processing fees. You can get paid faster by accepting credit card payments, mobile pay, and PayPal.

5. Set milestones

Some projects tend to drag on. You want to get it done and get paid, but the client or customer is dragging their feet. Set due dates and milestones to keep the project moving. If they miss these milestones, there could be extra charges or a renegotiation of the contract.

6. Use change orders

Along the same lines, if the customer continually changes their mind, that extends the project and may leave you on the hook for restocking fees or re-hiring subcontractors. Use a change order and charge the customer for any costs you incur. Require those costs to be paid at the time of the signed change order.

7. Ask them to purchase the supplies

If cash flow is a big problem and they don’t want to pay a deposit, ask them to purchase the needed supplies and materials on their own (more on cash flow definition here). You might lose any markup that you placed on the materials, but it beats losing the client altogether.

Another strategy is to offer this up front and adjust your labor costs to make up for any loss of profit from the materials.

8. Don’t spend so much

It seems so simple, but how often have you purchased something you don’t need? If your computer software works fine and you don’t even know what’s in the newest upgrade, don’t buy it. Same with your phone or other office equipment.

If that non-so-attractive desk still works, keep using it, and just because your competitor has something for their business doesn’t mean you should, too. At the beginning, only purchase what you need to do a fantastic job. All the bells and whistles can come after the cash starts rolling in.

Along the same lines, buy used or reconditioned equipment. You can find reconditioned electronics complete with a warranty for a substantial discount.

Bottom Line

If you don’t have cash, it’s hard to expand. Managing your cash flow involves not only getting people to pay on time but also carefully tracking all investments. If you can produce cash by selling old products or assets at a loss, taking a loss might be a gain.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.