No matter how successful your business is in terms of sales and profits, if you don’t have good cash flow, you’re going down. You need that money in your hand, not in your accounts receivables book. The solution is obvious: get clients to pay sooner and delay payment to vendors if needed. But how?
“Improving cash flow is never easy and it’s never fun,” says Bryan
Heathman, director of audio recordings company Made For Success, who has founded three businesses. “You push out payments to your vendors and you beat up collections to your accounts receivable. You have to be on top of it. Telling a vendor you’re going to hold off payment for 30 days is not fun. Calling your biggest customer and saying ‘Your invoice is 15 days past due and we need a check by then end of the week or you’re going to incur a service fee,’ is not fun. You can’t always be a quote unquote nice guy.”
But instead of a stick, you can often hold out a carrot to both vendors and customers – if you start early and focus on building the relationship. With suppliers, emphasize from the beginning that your company will grow and you expect to be buying in bigger quantities in the future, says Leah Higginbotham, founder of hugamonkey.com baby slings.
“Tell the vendor you can promise them more business in the future if they can give you 60 more days to pay,” Heathman says.
Establish a good relationship right from the beginning, Higginbotham says. “We’ve been with the same fabric wholesaler for two years. My husband did a lot of phone work in the beginning. We work with the same person every time. They’ve been kind to us. We’ve been kind to them. Now we can ask to pay for our fabric in 30 days. We’re buying 200 yards at the 600 yard price. He took a lot of time convincing them that in the future we would be buying a lot more. We told them, ‘We want to stick with you a long time.’ They were willing to lower their prices for us.”
On the other end, you need your customers’ payments early or at the least on time. If you’d rather not sound punitive, offer a small discount. “Tell your clients that if they pay you within 30 days of invoicing, you’ll give them a 2 percent discount,” Bryan says.
That carrot approach worked well in my own business, Queen Music Studio. Several years after I founded the studio, many payments were trickling in two months late. As soon as I offered a $4 discount for payment at the end of the preceding month – pay February’s tuition by Jan. 20 – more than half of the payments began coming in early and most of the rest came in on time. Parents drove payment to my studio on the 20th to save that $4. Cash flow problem solved.
It wasn’t until the economy slowed down in 2008 that I finally had to add a stick – a $4 fee for late payments, paying February’s tuition after Feb. 20. To be honest, the stick didn’t help me collect those late payments. But the tiny bit of extra cash made me feel better about waiting for my money.
Finally, a key, obvious way to improve cash flow is to cut expenses – travel light. That might mean laying off or at least not hiring employees, Heathman says.
“May entrepreneurs tend to pay their vendors and their employees before they pay themselves, Heathman says. “I have strong advice: pay yourself first. And then use what’s left over to manage your accounts payable. If there’s not enough to go around, you have to be aggressive about reducing your costs. That often comes at the expense of employees. My advice (and his current strategy) is to rely heavily on contractors instead of employees. Remember, there’s one reason why you are in business and that is to make money. Many entrepreneurs lose sight of that.”