Improving Your Cash Flow
In my last column I introduced the strategy of budgeting for profit by starting a profits account for your business that should be funded monthly. As I noted, the key to making sure that planning for profits pays off for a small business often lies in the owner’s ability to become an expert in cash flow management.
Cash flow is essentially the movement of money in and out of your business. Cash inflow generally comes for the sale of goods or services to your customers (or patients, if you’re a doctor). Cash outflow is generally the result of paying the operating expenses of a business, including salaries.
Track Your Cash Flow
The first step to becoming an expert in cash flow management is to start tracking it regularly. By using cash projections over time you should be able to determine the amount of cash that will be available during a designated time. To do this you need to produce monthly cash flow statements.
If you use bookkeeping software such as QuickBooks, an accounts payable report that tallies your entries for bills will show your cash outflow requirements. Likewise, projected cash inflow can be seen from an accounts receivable report that tallies your customer invoice entries for which you await payment.
Your cash flow reports can also benefit your business in other ways. For example, if you need a working capital loan or a capital improvement loan your cash flow statements can be used as supporting evidence to show the banker how you intend to pay the loan back and to demonstrate that you have the means to do so.
One typical cash flow problem I’ve seen show up in the Accounts Receivable Aging Summary reports of small businesses is the issue of late paying customers. Payment for your goods and services is the key source of income for your business. Anything that delays getting that money into your company’s bank account is a drag on your cash flow. If you have this problem at your business, you don’t have to live with it.
Tips For Improving Your Cash Inflow From Late Paying CustomersHere are five tips for eliminating those consistently past due entries you find in your accounts receivables report.
1. Make sure you send your invoices on time, every time.
Sometimes it’s not the customers making cash flow problems for a business, it’s the business itself. You benefit when you have a vendor who is lazy in billing you promptly. The longer he lets you keep your cash in your bank account the more interest you earn. However, each time you are late in invoicing your customers you’re the one who is losing out because they pay you later than you had planned or needed.
2. Take deposits or retainers when orders are taken.
I find that quite a few small business owners are in a position to take a down payment from clients but they do not because doing so just hadn’t occurred to them. How much is enough but not too much? Fifteen percent? Twenty-five percent? Fifty percent? If you have not done this before you may want to “test the waters” with various new customers to learn what price points are acceptable for your business.
