Small Business Cash Flow Strategies for Q4 Preparedness

Key Takeaways

• Q4 can bring both increased revenue and increased expenses. This makes cash flow planning especially important for small businesses.
• A Q4 cash flow forecast can help you anticipate cash shortages by identifying the timing of received payments and necessary expenses.
• Getting paid promptly is an important part of managing cash flow. Stay on top of delayed payments and outstanding invoices.
• Planning ahead gives you more options when cash gets tight. Don’t get caught in a cash crisis—know if you can plan for Q4 with your current cash or if you’ll need financing and/or professional guidance

For small businesses in western Virginia and across the country, Quarter 4 can be the busiest time of year. It can also be the most unpredictable. Between the holiday shopping season and year-end consumer spending, many small businesses experience an influx of sales. Increased sales do not always mean increased available cash, though. Before your small business receives these increased sales, you may have to spend money upfront on inventory, staffing, marketing, and other expenses. Like a growing business plan, preparing for your Q4 cash flow needs requires investing before the expected revenue arrives. Good cash flow management boils down to planning for when money comes in and when it will go out—and ensuring that your business has enough cash to cover financial obligations. This blog walks small business owners through some simple steps to plan for their Q4 cash flow needs.

Step 1: Take Stock of Your Current Cash Flow

Before predicting your cash flow needs, you’ll want to assess your current cash flow. It’s important to distinguish between cash flow and profit. Cash flow tracks money as it enters and exits your accounts on a given day. Profit is the difference between revenue and expenses over time—it can provide you with long-term financial insights but won’t help you get over the Q4 financial bumps.

You want to start by looking at your business’s current financial position. Specifically, take some time to review the following:

• Current available cash
• Average monthly revenue
• Regular operating expenses
• Outstanding invoices
• Upcoming bills and vendor payments
• Payroll obligations
• Existing loan payments
• Inventory commitments and needs

It’s important to get an honest assessment of your cash flow. A profitable business can still experience cash flow shortages if money is tied up in unpaid invoices or other expenses. It’s worth noting, too, that some cash obligations—such as payroll and loans—are less flexible than others.

If you have been in business for over a year, you can look at last year’s Q4 numbers to identify cash flow patterns. Essentially, the goal is to understand your cash flow prior to Q4, identify gaps or shortfalls, and give yourself time to address them before the busy season.

Step 2: Create a Q4 Cash Flow Forecast

Assessing your current cash flow allows you to make an accurate forecast of your Q4 cash flow. This forecast doesn’t need to be overly complicated. Rather, it should map out roughly when and how much money is coming in and going out.

Begin by estimating revenue month-by-month. List any expected expenses. (You’ve already completed this step.) One thing to keep in mind when forecasting your cash flow is that timing is just as important as totals. When will customers pay invoices? When are payments due to vendors? If payroll needs to increase for the busy season, when is payday? If there are other seasonal expenses, when will they occur?

When forecasting, it’s recommended to look at three different scenarios:

• • What you’re expecting to happen (based on last year’s Q4 and adjusted up and down based on your current cash flow)
  • A Q4 where you see an increase in sales
  • A more conservative Q4 where sales are down or payments are late

You’ll never predict your cash flow perfectly, and that isn’t the point. The goal here is to identify potential shortages and have a proactive approach that won’t leave your business strapped for liquid cash.

Step 3: Get Ahead of Outstanding Invoices

Delayed payments might be a little out of your control, but good cash flow management depends on collecting owed money as much as budgeting and generating sales. You’ll want to deal with outstanding invoices before things get busy. There are a few things you can do to collect owed money and prompt timely payments.

For current outstanding invoices, you will need to follow up with the customers as soon as possible. For customers who are struggling to pay, it might be worth accepting partial payments or payment plans to strengthen your cash flow.

Going forward, part of your cash flow strategy should be to send invoices promptly as opposed to waiting, make payment terms simple and clear for customers, and consider requiring deposits for larger sales. This can shorten the gap between the sale and the payment. After all, a sale can’t pay your business’s bills if you don’t get paid for it.

Accelerating collections is an effective way to strengthen your cash flow without increasing sales.

Step 4: Plan for Major Q4 Expenses

Once you have a plan for increasing your incoming cash, you’ll want to plan for your outgoing cash. Luckily, you’ve already identified current and potential expenses in steps 1 and 2 by considering payroll. However, having a list and having a plan are not the same thing. So how can you begin to prioritize these expenses to successfully navigate Q4?

We recommend separating expenses into three categories:

• • Essential expenses that must be paid
  • Flexible expenses (i.e. ones that could be delayed, scaled, or otherwise adjusted)
  • Strategic investments in the growth of your business

Obviously, expenses such as payroll, rent, insurance, and essential equipment must be met. Other expenses, like technology upgrades, location expansion, advertising campaigns, and business travel should be closely scrutinized. Ask yourself how much immediate business or growth this will generate versus the cash flow reduction. You might be able to manage some expenses in Q4. Other less immediate needs might need to be postponed until the busy season passes.

Step 5: Consider Financing Before You Need It

Many businesses still anticipate cash-flow gaps during Q4 despite proactive planning. Financing can help cover Q4 needs, such as inventory, equipment, operations expansion, and managing cash gaps caused by delayed payments. However, financing should be a deliberate part of your Q4 plan. It should not be a last-minute crisis response. You’ll want to consider both your financial needs and how repayment fits into your future business finances. Discussing potential financing with an F&M banking professional early on can help you understand your options.

Prepare Your Business for Q4 With F&M Bank

F&M Bank has been helping small business owners plan their financial futures for over a century. Business owners throughout Harrisonburg, Rockingham County, Timberville, Winchester, and Staunton have relied on the professionals at F&M Bank for their short- and long-term cash management needs. Preparing for the busy season means knowing your options, whether that be cash flow planning, business checking, or financing.

Contact an F&M banker or visit one of our convenient locations across the Shenandoah Valley to set up a cash management plan before Q4 hits!