A business that consistently generates negative cash flow may increase its risk of bankruptcy. That’s why successful business owners typically make cash flow management a top priority, sometimes even more so than generating new sales. While a business may survive with stagnant or declining revenues, it can’t survive without cash.
There can be many ways to help improve your company’s cash flow. After exhausting the usual options like securing a line of credit, negotiating better payment terms with vendors and offering discounts to customers that pay early, some businesses may still need to do more to have positive cash flow (more cash coming in than going out) each month. That’s when it may be time to get creative.
Switch Customers to ACH Payments
ACH or Automated Clearing House Payments allow for the direct, electronic transfer of money from your customers' bank account to your company’s bank account. Over $40 trillion was transferred via 23 billion ACH transactions in 2014, according to a 2015 report by NACHA. This represents about 90 percent of all electronic payments in the U.S. The system processes transactions daily allowing businesses to collect funds in one business day.
There are several different types of ACH transactions. ACH Direct Payment transactions allow consumers and companies to pay bills. ACH Direct Payment Credit transactions “push” funds to an account (when a customer initiates an ACH transaction to pay your company), whereas ACH Direct Payment Debit transactions “pull” funds from an account (when a customer preauthorizes your business to take money out of their account and your company can do so directly according to the terms of your agreement).
Both ACH Direct Payment debit and credit transactions can have a positive effect on cash flow. When a customer pays by other means like paper checks or non-ACH electronic transactions, it can take up to 10 days from the time the payment is issued until the money is in your account. ACH transactions clear the next business day. More importantly, with ACH Direct Pay Debits, you control when the payment is taken, eliminating the risk of hearing “the check is in the mail.”
Pay Your Taxes in Installments
Generally when you file your income tax returns, the IRS expects you to pay what you owe. This could be a problem if you don’t have sufficient cash on hand to pay them or if it means taking cash away from a critical business need. In these cases, the IRS allows small businesses to pay their income tax liabilities in installments. The terms and conditions can vary. For a small business that owes $25,000 or less, you can apply online for an In-Business Trust Fund Express Installment Agreement. This can give you up to two years to make regular payments to pay your debt. It doesn’t require verification of financial condition or the provision of financial statements.
If your business doesn’t qualify for this type of installment agreement, you can apply for a streamlined installment agreement for up to $50,000 in income tax liability or a standard installment agreement via Form 9465.
Don’t forget that paying in installments may trigger interest and penalties, which could hurt your company’s profitability, but that may be a price you consider worth paying if you cash flow is the priority.
Change Your Payroll Period to Biweekly
If your company currently uses a weekly payroll period, it may be time to consider switching to biweekly. By paying employees every other Friday instead of every Friday, your company can have additional time to generate sufficient cash flow to make each payroll. In many cases, that additional week can mean the difference between having to tap a line of credit or simply waiting for customer payments to arrive.
This option may offer the added benefit of improving profitability as well. Most payroll services provider charge your business every time payroll runs. By cutting in half the number of times they process your payroll, your administrative costs may also go down.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any financial or business strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.
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