7 Tips to Improving Your Cash Flow
by Pam Newman
Published on this site: September 3rd, 2005 - See
more articles from this month
Cash is King.That is what everyone tells us and it is true!
You cannot function successfully in any business without proper
cash flow. So if this Cash Principle is so well known, then
why is it that so many businesses struggle? Sometimes the
obvious is not always so obvious when you are entrenched in
running the day-to-day aspects of your business. Here are
7 Tips to Improve Your Cash Flow!
- Cash and Carry.
Operate a cash and carry type business versus worrying about
receivables. The best business plan is one where customers
pay at the time of purchase so you don't have to worry about
invoicing or collection procedures. Invoicing and collections
take up valuable time, so you want to come up with creative
ways to incentivize payment immediately. Set the ground
rules in the beginning so your clients know what you expect.
- Receivables Collection.
Collect your receivables in a prompt manner. Don't let them
hang out there forever until your customers decide they
want to pay you. Being a good steward of your business is
"good business", so have a process in place for
invoicing and collections. The longer your receivables are
outstanding, the less likely you are to collect. You don't
have to be mean and rough to collect promptly from your
clients. A good rule of thumb is that you should always
have a due date on the invoice and then send out a follow-up
statement within 10 to 30 days from the due date. Each industry
and business environment has different insights as to what
is the "ideal" time. I would not send follow-up
correspondence any sooner than 10 days past due. Payment
may just be delayed by the mail; however, waiting longer
than 30 days is too long. If you have not received payment
within 45 to 60 days of the due date, then a phone call
should be made to follow-up with your customer. Accounts
that go past due 90 or more days should be taken to the
next level of collections with an outside agency, internal
collection "ninja" or any other mode you have
established for collections. Find what works best for your
business and stick to it. Each day that you are delayed
in receiving payment is an additional cost of doing business.
Time is money.
- Receivables Funding.
Implement an accounts receivable funding program. Factoring
of accounts receivable has become very popular and it can
be a great way of keeping the cash flowing. Businesses who
deal with large businesses or government agencies lend themselves
to utilizing factoring programs. If your clientele is made
up of small businesses or individuals, you may find it more
difficult to establish an accounts receivable funding program.
Why? Funding companies are monitoring risk. There is less
risk with larger companies or government agencies. Or so
they think!
- Vendors.
Negotiate terms with your vendors to help delay the outflow
of cash payments. Lots of vendors have payment terms where
you can delay the payment until end of the month or maybe
even up to 60 days. This allows you a little float time
to use their money while you are working on your project.
Then hopefully you'll receive payment from your customers
prior to needing to pay for the products you purchased.
Some companies also go the route of consignment. Then you
are selling someone else's goods and don't have your money
wrapped up in inventory. This option can help you increase
your product offerings without having to invest large amounts
of money in inventory.
- Customer Deposits.
Have your customers pay a deposit prior to the start of
the job. This will help you cover your upfront costs as
you start the projects. It's very common to have a deposit
with the signing of your contract. It decreases the risk
associated with nonpayment because you've received a portion
up front. You can also implement periodic payments throughout
the contract vs. a single payment upon completion of the
project so that cash is flowing in consistently.
- Revolving Credit Line.
Establish a revolving line of credit through a lender to
help you with potential cash flow crunches. Especially if
the amount of savings from prompt pay discounts are greater
than the financing charge from the lender or the lender's
financing charge is less than what your vendors might charge
for late payments. This helps give your business a safety
net so that you can continue to operate during those times
when you are offered great specials if you buy today but
may not have extra cash available.
- Savings Fund.
Establish a savings fund to help you operate through slow
times. Most businesses have swings in their business flow
and managing cash effectively can be a challenge. Store
away extra during the good times to help alleviate issues
during the slow season. I know this sounds easier than it
is, but if you take out a percentage each month and transfer
it to a savings account then it will be "out of sight
and out of mind."
You may find that each of these 7 tips is viable for your
business, or maybe only 1 or 2. Anything that you can do to
focus on better cash flow will provide benefits to your business.
The worst thing you can do is sit back and "hope"
that things go well. Look around! See those "CLOSED"
signs on the surrounding shop windows? They played the "hope"
game and lost. What are you going to do? Hope? No.implement
a plan for cash flow management starting now.
Pam Newman helps business owners keep money from slipping
through their fingers. Pam is a Certified Management Accountant,
Certified QuickBooks ProAdvisor, and Author of Out of the
Red and Unlocking the Secrets of QuickBooks. Pam believes
that it is important for you to understand the financial picture
of your business, so that you can make informed decisions.
For more information, please visit http://www.rppc.net
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