Fifty percent of businesses in the U.S. fail in the first five years of operation, the U.S. Department of Labor estimates. Poor cash management is a primary reason for these failures, says the U.S. Small Business Administration. Having the right tools and knowledge about cash flow will keep your small business from becoming one of these statistics.
The Cash Confusion
Profit is not the same as cash flow, stresses Inc. Magazine. When your revenue is greater than your expenses, you can declare a profit. But you can show a profit on your books and have no cash in the bank. When you make a sale and book it in your AR, your revenue shows an increase. If you have a lot of sales on the books and a lot of slow paying customers, your revenue and cash flow could be way out of sync. Collecting customer payments on time and reducing expenses are the two ways to manage a healthy cash flow.
Managing Payments (Receivables)
In an ideal world, all of your customers would give you cash for products and services. In the real world, there are credit terms, purchase orders, CODs and delinquent accounts. Good cash management means addressing these in ways that gets the cash from a sale in the bank as quickly as possible. Some recommendations include:
- Offer a discount for paying bills early and in full. A 5 percent discount on a $1,000 invoice is $50, which is likely less than you would spend trying to collect on a late payment. But it may be enough incentive for the customers to pay off their balances.
- Ask for a deposit at the time of the order. This can verify if the customer is really serious about following through or if they are just gathering information from you on a product or service.
- Do credit checks on any non-cash customers. Make sure your customer can pay before delivering a product or service. Do a credit check on customers requesting credit. Note that small businesses may not have yet built up sufficient credit and credit is one way for them to do this. You’ll have to make a subjective decision on whether you want to extend credit or not. If it feels like a risk, don’t do it.
- Get your invoices out on time. Send out reminders at 30, 60 and 90 days. Small businesses may have a stack of unread mail on their desks or in their inboxes. Don’t hesitate to remind them. You can even consider sending an email reminder a week before invoices go out. Include a note of thanks and an offer of further business.
- Move away from paper bills and go electronic. Tools such as Intuit invoicing enable you to deliver electronic invoices and provide customers with a platform to pay online. Make it easier for the customer to pay you and some will take advantage of that opportunity. Customers appreciate less paper on their desks, too.
- Make sure you review your receivables and flag slow-paying customers. Put the chronically slow customers on cash-only or COD terms.
- Do everything you can before hiring a bill collector. SBA.gov notes you can plan on turning over 30 percent or more of the balance to a third-party bill collector. Writing off the balance may be less expensive than using an agency.
Managing Expenses (Payables)
The longer you can keep the cash in the bank, the better your company will look to banks, shareholders and investors. A few ways to do this include:
- Ask for credit terms when you buy from a supplier. Pay on time, but pay at the last possible moment. Use EFT or a phone call and skip the pay-by-mail option.
- Maintain a good working relationship between you and your suppliers. They will be more likely to help you if you must pay late or go on a payment schedule.
- Look for suppliers that have the most flexible terms as opposed to the best prices.