- Accounting and Payroll Service
- Best Metrics for Key Performance Indicators
- Best Practices for Invoice Factoring
- Cash Flow
- Extending Credit to Customers
- How to Identify a Business Partner
- Increase Cash Flow
- Money Saving Tips
- Purchase Order Financing
- Setting Priorities
- Small Business Decision-Making
- Small Business Lending
- Small Business Management
- Tech Tools for Small Business
- The Need for Optimism
Are You Managing Your Cash Flow Effectively?
Healthy cash flow is the lifeblood of any business. Too often, small businesses find themselves so cash-strapped that interferes with their growth as well as day-to-day operations. Fortunately, there are steps you can take to improve your cash flow management. Here are five strategies to help you manage cash effectively:
1) Keep Track
The first step in getting control of your cash flow is to understand your cash flow cycles. Track your cash flow projections by establishing your starting balance and then plotting out, month by month, when you expect to receive cash in and when you expect to pay cash out. You can find inexpensive software or free templates online that make the process easier for you. By doing this, you may foresee future cash-flow bottlenecks and you may be able to manage it better.
2) Collect Receivables
A cash flow projection is not factual document. It is a set of guesses, based on assumptions that your customers will actually pay on time. One of your biggest challenges may be to collect in a timely manner. The first step is to make sure you are invoicing customers regularly, predictably, and with clear terms. You can make it easier to get your receivables into your bank account by using a service that provides online invoicing and payments. Many of these services, such as WePay, FreshBooks, or PaySimple, offer automatic invoicing and invoicing reminders. Another way to collect is to set up a lockbox service with your bank for those people who pay by check. A friendly phone call to your customers sometimes goes a long way in getting paid on time. If you are a service provider, consider taking deposits and payments up front before you start the work.
3) Establish Discounts and Penalties
Offer discounts to people who pay early. Some of your customers will find this valuable. If you have chronically late-paying customers, try to offer them an incentive to pay sooner. If they are more than 90 days past due, offer them a discount to settle immediately. This may be less expensive or more effective than hiring a collection agency, and getting some cash from the delinquent customers is better than not collecting at all. You can also attach a penalty for late payments as long as you are explicit up front about your terms. Customers may be incentivized to pay on time just to avoid the penalty.
4) Control Payables
When people think about cash flow, they tend to think about receivables first. It is important to manage payables as well. Take full advantage of payment terms that your creditors offer. Pay your bills when they are due. If your creditor is offering an early payment discount, calculate whether or not it makes sense to pay early. It may be more valuable to you to have the cash in your account until due date than it is to get the discount. Make sure you pay your employees first—they are your most important asset. And if you can’t pay others, let them know as soon as possible and negotiate alternate terms up front.
5) Manage Your Shortfall
Even the best businesses run into occasional cash shortfalls. As a matter of fact, growing businesses are especially prone to gaps as they invest in new property, supplies, infrastructure or services in order to grow. If you have taken all the steps above, not only do you have a far better chance of predicting a potential shortfall, you are also in the best possible shape to obtain funding. You can approach bankers or suppliers to extend credit to you. Or, a creative approach to funding your current operations without borrowing by using alternative lending solutions like factoring & purchase order financing.
Does cash flow management take a lot of discipline and effort? Absolutely. But these techniques will help you obtain healthy and long-lasting business success.