Poor cash flow management is one of the most common stumbling blocks for small businesses. Accurately monitoring cash inflow and outflow is a key management task for business owners. The bottom line is that if there’s too much time between when your customers pay you and when you have to pay suppliers and employees, you are setting up for disaster. How can you improve your cash flow management? Consider three common sense tips:
1. Prepare Projections
Cash flow projections can be made annually, monthly or even weekly. Their main purpose is to indicate a problem that may occur before it actually does. Projections are not just predictions about the future. They are well-researched estimates that take into consideration many variables, including expenditures, customer payment history, vendor deadlines and seasonal sales fluctuations. Consider your projections to be just as important as your business plan and mission statement.
2. Improve the Receivables Process
The goal is to speed up the amount of time between when a sale is made and when you actually get paid. Consider the following methods:
- Invoice promptly – If you take a long time to invoice, it will give the customer the impression that they can take their time.
- Make deposits quickly – Taking a long time to deposit checks from customers can also give them the impression that you are in no rush to receive their money.
- Clearly print due dates – Printing “due upon receipt” is never a good idea. Have a specific due date.
- Offer incentives to pay early – Sometimes late fees are not very customer friendly. Do the opposite. Offer a discount if the customer pays early.
- Weed out bad customers – If a customer costs more to maintain than he or she is bringing in, cut them loose. Better yet, run a credit check before you take them on as a customer. If they are not credit worthy, require a deposit at the time of sale.
3. Improve Your Payables Process
Hold onto your money as long as possible, without being past due with your creditors. Consider the following suggestions:
- Pay on time, not early – It feels good to pay early, but if cash flow is an issue, don’t do it. Take advantage of the time creditors give you. Many creditors even allow you to pay on the due date online. That way you hang on to your money as long as possible.
- Be careful of discounts for paying early – As mentioned above, offering a discount to pay early is an incentive often offered to encourage early payment. However, read the credit details carefully. The discounts may be a great way to reduce your overall costs. At the same time, you could just be loaning your money to your creditors.
- Communicate with your creditors – If you do need to make a late payment, contact your creditors immediately. Tell them your situation and when you plan to pay. If changing your due date to a different time of the month would be better, ask about changing the terms.
- Consider payment terms when selecting suppliers – Cost is usually the number one factor when researching which supplier you should use. However, if you have cash flow problems, it is wise to look for suppliers with more flexible payment terms.