Only a perfect business receives cash from customers just in time to pay all of its bills. For most businesses, cash arrives in lumps with long dry spells in between. The weeks before one of these lumps can be very stressful as owners scramble to find desperately needed cash.
While you may be willing to wait to get paid, many suppliers and employees won’t be so flexible. To avoid this stress, you need to use different tools and techniques to smooth out your cash lumps to be able to pay your bills on time.
Model Your Cash Flows Weekly
Using Excel, build a simple model that tracks incoming cash by source and outgoing cash by use. The model should be organized on a weekly basis. Building it monthly won’t give you sufficient detail to truly understand the ebb and flow of your cash. Some bills are due on the first of the month; others are due on the 15th, and your invoices may not get paid until the last day of the month. A weekly model will capture these lumps and help you identify structural problems. Consistent cash shortfalls mean you need to rethink when you invoice your customers, the payment terms you provide and when you agree to pay vendors.
Forecast Your Cash Flows Monthly
A cash flow model is for short-term cash management. A forecast helps your business plan its cash over the long term. Your cash balances may be flush for the time being due to one-time occurrences like many clients paying at once or an unusually large project. These factors can provide a false impression of good cash management when in reality you’ve just been lucky.
Apply for a Line of Credit Before You Need It
A line of credit is the most powerful weapon in the cash management arsenal. Businesses can access these lines when needed and pay them back when cash comes in from customers. Most lines of credit don’t charge any fees until you draw down on the line. Therefore, it costs your business absolutely nothing to have a safety net that can help you deal with long periods where customer cash doesn’t come in. Waiting until you are in a cash crunch to apply for a line of credit is the worst mistake you can make. Getting approved will be extremely difficult, and approval may take too long to be useful.
Be Creative With Your Payments
When facing a cash flow shortfall, be creative to avoid defaulting on loan payments or being late with vendors. One strategy is to take advantage of the payment terms offered by vendors, which usually provide 30 days to pay. On the last day to pay, do so using your business credit card or charge card, which provides at least another 30 days to pay. This doubles the amount of time you have to collect cash from customers to pay off the amount owed.
Managing cash flow should be treated as one of the most important tasks that a business owner undertakes. It is just as important as selling. If you don’t have the cash you need when you need it, it could mean the end of your business.
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