The life of a business owner is often a balancing act. You have bills to pay, employees to schedule, deliveries to make—the list goes on and on. But one of the most important tasks can be your cash flow or expense management.
Whether you're trying to improve your cash flow, boost your business credit score or give yourself more spending flexibility, knowing the best times to pay your expenses is essential for the long-term success of your business.
Here's a rundown of how to time your payments to make the best possible impact on your bottom line, as well as your short- and-long-term outlook.
Extend your payment cycles to ease cash-flow crunches.
One of the most common cash flow management issues is having to wait for clients to pay their bills while invoices for your own vendors are outstanding or payroll is due. Those pressing expenses can't wait, but you simply may not have the cash on hand to pay for them.
There are a couple of things you can do to take full advantage of your payment terms. The first step is understanding what your payment cycles are for your vendors. Do they want you to pay within 30 days of the invoice being issued, or can you ask for an extension to 45 or 60 days? When are your bills and rent due?
One of the major benefits of using a credit card, and using it responsibly, is that it helps you build your business credit.
Once you know the upper limits of your payment cycles, you can set your credit cards to autopay your expenses on the last day of each cycle. You'll fulfill your obligation to your creditors while giving yourself another three to four weeks to pay your bills without accruing interest.
Pay early to give yourself flexibility.
If you prefer to leave yourself some flexibility at the end of the month for variable or petty expenses—such as a surprise celebratory happy hour for your team after a big win—and typically don't have issues paying off your vendors, set your bills for your fixed overhead costs to autopay soon after your regular deposits hit your account.
This way, you'll have a better idea of what extra income you have to play with as the end of the month approaches.
Boost your credit score by reducing credit utilization.
One of the major benefits of using a credit card, and using it responsibly, is that it helps you build your business credit. If one day you hope to qualify for an SBA loan, or want to eventually utilize a line of credit, a strong business credit score (along with a solid personal credit score) can make all the difference. Making regular purchases—and payments—with your business credit card can boost your business credit score, as long as your card's issuer reports to business credit bureaus.
One of the best ways to build your credit is to keep your credit utilization—the ratio of how much you spend on your card to your overall credit limit—low. To accomplish that, when you spend big on your credit card, pay off what you can before your actual statement closing date.
If you put $1,000 on your credit card, but pay off $500 before the statement closing date, you'll only owe another $500 during your payment grace period—and credit bureaus will only report that you owe $500 against your spending limit, rather than what you actually borrowed. This can help raise your score ahead of any major lending applications.
A good rule of thumb is to try to keep your credit utilization rate below 30 percent. Any more than that and you risk dinging your score. It will also likely prevent you from maxing out your spending in case of an emergency that requires you to put the costs on your business credit card.
Audit your expenses and processes.
A broad and complete self-audit of your business expenses on a periodic basis can help you identify cash flow problems or times that are less-than-optimal to withdraw funds from your business accounts.
What subscription services do you use? Do your cloud-based services or software overlap at all? What days of the week or weeks of the month or year show the greatest fluctuations one way or the other? Are you sending out multiple shipments that could be combined in order to save on freight charges? Are you using a business credit card for expenses? If so, are you maximizing its rewards and benefits?
Conducting an audit will give you a better sense of how to conduct your expense management, including whether or not you're putting yourself in compromising financial situations simply by when you pay your bills. Even moving your utility payments back by a few days—which you can usually do by contacting your utility companies—can ease up your cash flow.
Good business owners get creative with their payment solutions, both in terms of the tools they use and the times they use them. If you're still having trouble timing your payments, consider talking to an accountant about planning your finances. They can help put together a business budget that's right for you.
The information contained herein is for generalized informational and educational purposes only and does not constitute investment, financial, tax, legal or other professional advice on any subject matter. THIS IS NOT A SUBSTITUTE FOR PROFESSIONAL BUSINESS ADVICE. Therefore, seek such advice in connection with any specific situation, as necessary. The views and opinions of third parties expressed herein represent the opinion of the author, speaker or participant (as the case may be) and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions. American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any such opinion, advice or statement made herein.
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