For entrepreneurs starting a new business and seasoned veterans alike, sales feed the business, but sales without cash flow is like bread without water. Sooner or later the business will dry out and die. It’s cash that feeds the internal organs of the business that make it go. Managing your business finances is one of the most important aspects of running a business. It may be why you spend a boatload of time keeping track of your cash flow, balance, and income statements. When managing your business finances, cash flow is a paramount metric, especially for start-ups. Managing your finances will never be easy, but you may be able to make it easier on yourself.
Timing is Everything
Your cash flow will tell you when you have cash coming in, with sales, loans, and other forms of income, and when you have to make payments or spend money on other expenses. The timing of both of these incidents is critical for your success. You need to coordinate between the two. Getting sales as a new business owner or entrepreneur is exciting, but in the history of the planet, a sale never paid a bill. Cash does. Make sure you have a process to collect the cash. If your business takes payments in installments or if you bill your customers for your products or services, you need to keep track of these payments carefully. One way you might be able to make this process simpler for you is to give an incentive when your customers pay for their product or service early.
Make a realistic projection for the next fiscal year, the next quarter, and the next month. This does not necessarily mean that your actual cash flow will follow your projections, but it could help bring your attention to a problem before it happens. As you map out your plan, keep in mind your customers’ payment histories, what you think you will have to spend, and seasonal effects on your business. You never know what will happen with your customers in the future, so don’t assume that your receivables will continue at the same rate as they have in the past unless you can back up that assumption with evidence.
Collect Cash as Quickly as Possible
This may be a bit obvious, but you need to get cash from your customers as quickly as possible. It is staggering how many small businesses are horrible at collections and suffer as a consequence. There are many ways you can speed up this process, like these strategies:
- Have your customers fax in their orders.
- Send out invoices on the same day the shipment goes out.
- Tell the customer when the payment will be due directly on the invoice, and include a note telling the customer what the penalty will be for a late payment.
- Deposit all of your checks the same day they are received.
- Tell your bank you want availability of two days or less. Don’t accept the customer availability of one to five days that most customers get.
- Get a bank lock box where all of your customers’ mailed in checks will go. The bank will pick up those checks throughout the week (including weekends) and credit your account much more quickly.
- Control your accounts receivable policy. You will want to make sure your customers have good financial health if possible. Check with a business credit rating service like Dunn and Bradstreet and always get bank references before you extend credit to a new customer. Proactively follow-up on customers who have a history of making late payments before they are late. Don’t send out new orders for product to a customer that has an unpaid bill. Provide early-pay discounts to accounts that pay bills early.
These practices can make new business owners uncomfortable and not customer-friendly. Get over it! Your business survival is priority number one, and the tight policy will help your business in the long run.
Elise Brown is an author who writes guest posts on the topics of personal finance and credit. She also owns an educational website about the risks associated with payday loans.