Healthy cash flow is a must for growing businesses. Everyone knows it, yet almost every company, sooner or later, has cash flow problems. Some surveys of business owners indicate that at any given time, up to 50% of small business owners are encountering some sort of cash flow difficulty.
The basics of cash flow management are fairly easy to grasp: Money coming in needs to exceed money going out. But the day to day chore of making that actually happen can be difficult, especially when you have so many other facets of your business to oversee.
As your company grows, its cash flow situation will change, likely for the better. But for the near term, here are a few ideas for managing your cash flow more effectively.
1. Anticipate potential cash flow problems. Be prepared. It happens to even seasoned business owners, but try to not be caught off guard when it comes to interruptions or slowdowns in your company’s cash flow. This means you need to anticipate potential trouble.
Keep an eye on your company’s cash flow “pipeline.” Be prepared for seasonal factors and changes in general economic conditions that could either slow payments coming in, or accelerate payments out. And you show always update your company’s cash flow projections at least once a quarter.
2. Be proactive with invoices. On large orders, be sure to ask for a deposit or even full payment, if circumstances allow. Send the invoice as soon as possible; in fact, it should be prepared and presented along with the order, not days later.
And here’s a tactic that’s often overlooked: Consider offering a discount for severely overdue invoices. You should only use this as a last resort, and you may need to reevaluate the future credit terms (if any) you extend to that customer, but this can often result in a fast payment. Set a very near-term deadline (three business days) and make the offer attractive enough (20% off the amount owed) for the customer to take notice.
Tip: Remember, you don’t have to extend credit to anyone. Evaluate these arrangements on a case by case basis.
3. Create an “aging receivables” file. All receivables need not be treated equally. Implement an “aging” schedule of what you are owed, and by which accounts. Call overdue accounts quickly, and ask if you can do anything to help them make a payment (splitting the invoice into two payments, etc.)
4. Evaluate leases, contracts and other long-term obligations. Your landlord, insurance carriers, delivery services and similar vendors might be willing to negotiate a better deal for you, especially if your current agreement is almost expired. It can’t hurt to ask. Think incrementally. If you re-work three or four contracts, even if just by a couple percentage points each, the annual savings – and improvement in your cash flow situation – can be significant.
5. Time your payments. Ask your suppliers about the possibility of obtaining a discount for an early payment – some will spell out this option on the invoice. Even a couple of percentage points from your vendors over a year can save a lot of money. If they don’t discount, it makes sense to put off payment as long as possible. That doesn’t mean you should be late; only that you needn’t be early. For an invoice due in 30 days, for example, why pay at day 17? Paying right at the deadline will keep your suppliers happy, and also keep your cash reserves at an acceptable level.
6. Offer electronic payment service. Your bank can set this up for you. For a reasonable fee, your customers can have payments “wired” from their accounts to yours. This eliminates waiting on both mail delivery (2-3 days) and for the check to clear (1-2 days).
7. Use Invoice Factoring. Factoring your customers’ invoices can help you access your customer’s payments more quickly and also reduce your costs associated with accounts receivables, collections, and even expenses associated with serious cash flow problems, like late payments and charges for checks written on non-sufficient funds.
For More Great Ideas for Entrepreneurs from MP Star Financial:
MP Star Financial’s invoice factoring services can make your company’s cash flow more predictable, allowing you time to run your business and grow your company. Call MP Star Financial for more information at (800) 833-3765, extension 150.