We all know cash is the lifeblood of small businesses. Cash comes from sales, account receivables collections, and the sale of assets. Unfortunately, as long as more cash is flowing into the company than going out, many owners fail to pay close attention to their cash management plans.
If that sounds like your business, it’s time to take a closer look at your system. One of the major lessons from the recent recession is the importance of having an adequate supply of liquid assets, such as cash and its equivalent, on hand when business slows down.
Implementing efficient cash flow techniques ensures that your company always has enough money to meet its financial obligations. A shortage of cash could lead to embarrassment due to late payments, or in the worst case scenario, bankruptcy. To avoid those problems, check out these tips to make sure your cash flow system is top-notch:
It may sound obvious, but making sure your billing, collections and payables systems are efficiently operating should be your first stop. Use check lists and automatic calendar reminders to keep track of payments that are due.
If the account payment is a receivable, then make sure that you bill promptly, follow up on overdue invoices, and quickly collect on overdue accounts. The longer your customer's balance remains unpaid, the greater the chance you will not receive full payment.
Offer “carrots” for early or pre-payments.
To the extent possible, get your customers to pay you as early as they can, perhaps by requiring up-front deposits or offering an incentive. “You'd be surprised how many of your customers might be willing to pre-pay for your services or products if you offer a nominal 2-5 percent discount,” Matt Mickiewicz, co-founder of 99designs, tells The Huffington Post.
Give bad customers the boot.
If a customer is consistently late in making payments, cut that person off. This may cause you to have fewer clients at first, but it will allow you to focus on providing optimal services for your loyal customers, thereby building a better reputation, which will more likely pay off in the long run.
Tighten credit requirements.
Offer the best product or service relative to your competitor so that you can obtain the best possible credit conditions, says Isabel M. Isidro, managing editor of PowerHomeBiz.com.
“To improve your cash flow position, you can be more stringent in your credit and terms, requiring more customers to pay cash for their purchases,” says Isidro. “This will increase the cash on hand and reduce the bad-debt expense.”
Be aware of the trade-off to tightening credit, however. A flexible credit policy gives more customers the opportunity to purchase your products or services. Weigh the potential decrease in sales against the benefits of having more cash before making any changes.
Review your expenses
Make sure you are not trying to grow your small business too fast by spending aggressivley. “The largest problem entrepreneurs face is the pull between revenue generating and ‘brand building’ activities which do not generate steady cash flow,” says Kris Ruby, founder of Ruby Media Group LLC. To bridge cash flow gaps, focus on your top 3 revenue generators, recommends Ruby, and put your "brand building" on hold.