Understanding Your Cash Flow
In the same way your heart relies on a fully functioning circulatory system to maintain good health, your business depends on proper cash-flow to achieve financial success and grow.
Failure to understand and manage how money moves into and out of your business over a given time period can be ruinous. According to industry studies, cash flow problems account for more than 80 percent of small business failures.
Fortunately, by focusing on a few key topics, you can keep your cash flow and your business healthy.
Invoicing customers as soon as work is finished, making sure invoices are processed correctly with the specified due date and details, offering incentives to encourage early payment and following up on late payments can help you ensure a healthy cash flow.
Set a goal to clean up your account receivables within 30 days or less. Start by setting deadlines on the length of time your customers have to pay their invoices and make sure they understand their terms of payment.
Be persistent when it comes to contacting your customers about outstanding invoices. Experts recommend calling customers the day after a payment is due. Software solutions are available that can help you automate your account receivables or the invoicing side of your business in order to avoid a cash flow crunch.
When it comes to cash outflows, be aware of vendor discounts for early payments that can help you increase your margin or consider paying with a credit card that offers cash back rewards. Also investigate extending your payables by negotiating two or three month same-as-cash agreements with vendors.
Paying bills early could leave you short of cash, so consider withholding payments until their due day. But avoid late payments which could lead to penalties and strain your good standing with vendors.
Prepare for the unexpected
Recognize the importance of having a cash reserve to handle unexpected expenses caused by natural disasters, equipment breakdowns or an unexpected bankruptcy from a customer who owes you money. A six-to-12-months reserve to cover operating expenses could enable your business to weather any cash shortfalls that may occur while buying you time to initiate corrective measures.
If having a line of credit is part of your contingency plan for unexpected occurrences, the best time to meet with your financial services provider is when business is good and your financial records are up to date. Avoid waiting until you are deep in a crisis to apply for credit.
It’s OK to ask for help
Your business accountant and bookkeeper can provide specific expertise when it comes to preparing your business plan, answering questions about cash-flow projections and forecasts, and even help maintain your financials. While outsourcing comes with expense, it typically frees up time and energy that you can invest back into your business or devote to family and friends.
We know from experience that successful owners share a common belief that you can’t manage what you don’t measure. These owners pay close attention to their financial recordkeeping and accounting, which provide them with a solid basis for making thoughtful and deliberate decisions about their cash flow.
In addition to knowing their numbers, successful small business owners follow best practices when it comes to their accounts receivable and accounts payable.
Cash flow is the lifeblood of your business. By adhering to best practices and applying these tips, you will be in a better position to diagnose the health of your business and make informed decisions concerning its viability.
Tips on accounts receivable
- Invoice in a timely fashion and aggressively follow up on overdue invoices.
- Make sure your payment terms are reasonable and make sense to your customers.
- Follow-up on late payments immediately.
Tips on accounts payable
- Take advantage of vendor discounts for early payments.
- Adopt advantageous payment vehicles such as credit cards with cash back rewards.
- Determine optimal timing of all cash disbursements and withhold payment until their due date
- Build an emergency fund to cover cash flow crunches.
- Establish credit with prior to needing it.
- Don’t be afraid to ask your accountant or bookkeeper for help
About the Author: Clint Sporhase leads First National Bank’s efforts to serve small business owners. Clint has 25 years of sales, marketing and strategy experience.