Do you remember when, in 2020, everyone couldn’t wait until things would get “back to normal” in 2021? It didn’t quite work out that way, and 2021 was a unique challenge for businesses in their own right. Conditions have been highly volatile, as many nations experienced further damaging waves of the pandemic.
Yet with signs pointing to Omicron infections finally on the wane in much of the US, 2022 offers the hope of conditions that resemble normality.
This means that small businesses must shift out of survival mode and back to a long-term mindset again. The many businesses started during the last few turbulent years have never experienced this before. The pandemic led to a boom in small business creation, with 4.4 million new businesses in the US in 2020.
Morale will be higher, but strategy must adjust to ensure cash flow becomes more resilient. Indeed, small business management platform vcita recently surveyed its user base and found that cash flow was a top challenge in 2021.
This can mean taking some decisions which are tough in the short term but are the sound thing to do. It includes making investments in the right tools which will create efficiency savings once they are properly set up.
Here are six tips for a prosperous 2022.
Rebuild your reserves
It’s no secret that many companies were forced to dip into their reserves to survive the famines of lockdown economies. They did the right thing, too, as the whole purpose of the reserves is to deal with emergencies and the pandemic clearly was one.
So it’s unsurprising that 44% of small businesses had less than three months of reserves at the end of September, according to Goldman Sachs.
In 2022, the worst of the crisis should be over, and businesses need to return to the standard benchmark of at least three months in the tank; ideally six months minimum. The future is unpredictable, so we don’t know when another shock will hit the system. Those who fail to rebuild their reserves may run the risk of running out of runway.
Interest rates are highly likely to rise again in 2022, according to Fed policymakers, putting additional strain on already depleted reserves. Focus on storing money away at a sustainable rate and avoid large scale new investments until you are secure again.
Set up automated billing
The technological assistance available to small businesses has become more attractive with each passing year. The pandemic emboldened digital companies to expand faster than they would have otherwise, meaning their services are stronger competition for traditional methods.
When it comes to creating and sending invoices, using a tool to automate it for you is an obvious decision.
Manual invoices are time consuming and prone to costly human error. Invoices may be sent too long after the purchase is completed, which leads to an unnecessarily stunted flow of cash into the company.
The aforementioned vcita offers a smart system that can automatically create and send invoices to customers who have payments in “due” or “overdue” status. As the platform also offers a built-in CRM and appointment booking, it will always pull in the correct information and send the invoice in a timely manner. It can also send reminders automatically to encourage customers to pay promptly. This way you and your staff only need to focus on generating sales and fulfilling services, and the system will handle the administration.
Have access to a line of credit
A line of credit acts as a lifeline when cash flow is weak to prevent you from running out money to pay your stakeholders. With reserves currently so low in many small businesses, this is an important extra wall of safety until the balance sheet returns to good health.
Interest rates on line of credit business loans are generally low, and the limits tend to be high relative to equivalent personal credit cards. Just like a personal credit card, it can be used to prove creditworthiness to financial institutions. If you pay back the credit in a punctual manner, it builds your credit score.
In the future, if you wish to expand your business but don’t yet have the cash to do so, this can open up many opportunities for you.
“Getting a business line of credit, using it and paying it back on time can help a new business build a business credit score, notes Experian’s Karen Axelton, “which will make it easier to get other kinds of financing as your company grows.”
Make it easy for customers to pay you
The basic principle of good cash flow management is receiving cash from customers as soon as possible. Then the reverse is also true; delay paying out expenses whenever you can without compromising on any vendor relationships.
If your customers need to jump through hurdles to pay you, then it increases the time until you receive the cash your business needs. They may procrastinate or become frustrated trying to decipher what they need to do.
The solution is to make it as simple as possible to reduce the friction for the customer. You should use recognized tools that have strong reputations, as many people could be skeptical of giving their financial information to a service they don’t know.
For instance, you can send customers a link to a personalized PayPal page, where they can send money without the hassle of needing to add a new payee to their bank account.
Update forecasts regularly
If the pandemic taught us anything, it’s how fast things can change. Forecasts made in February 2020 were useless by the end of March 2020.
Yet forecasting is still a critical part of good cash flow management. It allows you to see where you may be in net negative in advance so you can change spending patterns to alleviate the pressure. A good forecast can stop you spending cash that you won’t have for some time.
If you struggle with creating forecasts in an agile way, you can use a tool such as Planful, which automates most of the process for you. It allows you to easily update assumptions and see what effects they have on a cash flow forecast.
Consider a subscription model
Subscription platforms such as Onlyfans exploded during the pandemic. Over time, people have become more accustomed to spending smaller amounts regularly rather than large purchases. It’s a shift that’s been made even by giant tech companies such as Adobe and Microsoft, who used to charge high prices for one-off software license ownership. This isn’t just a tech trend, however. For example, take Gillette razors, who now offer a subscription too.
A subscription model is good for cash flow because it’s easier to predict and leads to less of a boom and bust cycle. This is especially true for businesses who normally receive most of their earnings in the Christmas period then are net negative for most of the rest of the year.
Bank of America’s Anthony Hauck notes that “Subscription services can be a good way for merchants to establish predictable revenue.” This could mean much less stress for you and your business and give the certainty to encourage new investments.
What you should remember
The outlook for 2022 promises to be much brighter than recent years as the pandemic starts to become manageable. Small businesses must leave crisis mode and put in place proper practices for cash management to build for the long term. Here are the six top tips:
• Rebuild your reserves to cover at least three months, ideally six
• Set up automated billing so invoices are created and sent in a timely manner
• Have access to a line of credit as a last resort and to build your credit rating
• Make it easy for customers to pay you using trusted digital tools
• Update forecasts regularly to pinpoint potential net negative months
• Consider a subscription model to make your cash flow more predictable