Managing Your Cash Flow ~ Part 1
One of the make-it-or-break-it skills in running a small business is the ability to manage cash flow. The way money flows in and out of your business will not only affect how much you can take home to the family coffers, it’ll affect your need to borrow and your supplier relationships since you have to have money to pay bills.
It’s been estimated that over 60% of business don’t survive five years and that the main reason for failure is bad cash management. Loads of small business managers and self-employed people neglect their cash flow until it is too late to recover.
In it’s simplest form, cash flow management means getting the money customers owe quickly while paying your own bills at the last possible moment without incurring interest or fees. But it involves many components from bank accounts, to accounts payable and receivable, to inventory management. In essence, effective cash flow management means squeezing every penny out of your daily business.
1. Get Your Money.
If you got paid for sales the instant you made them, you would never have a receivable. In the real world you likely have to cut an invoice and then wait to be paid. The longer it takes for you to collect the money you are owed, the more strapped your business cash flow will be.
It may seem obvious but the first step in getting the money in the door quickly is letting the customer know what he needs to pay. That means sending out your invoice as soon as you can – not a week or two later when it’s ‘convenient’ to batch process the invoices. Every invoice should indicate when the payment is due, along wit the penalty for late payment.
Track your accounts receivable to highlight -- and avoid -- slow-paying customers. For clients who are chronically late payers, instituting a COD (cash on delivery) policy is a bertter alternative to refusing to do business.
Once you receive payment, deposit the cheques immediately. Every day you hold a cheque for deposit, means one day’s lost float. And if you wait until Monday to deposit the cheques you got in Friday, well, there’s three day’s worth of float gone.
One way to get money in the door faster is to ask customers to make deposit payments at the time orders are taken. Another is to incent clients to pay quickly by offering a discount. Careful now, don’t make the discount too big. A 1% or 1.5% discount is more than adequate. And watch the date. Don’t let clients claim the discount if they do not pay within the grace period offered.
If you are penalizing for slow payment make sure the “late fee” is clearly stated; a 2% per month late fee is pretty standard.
Just because you’re charging a penalty doesn’t negate the need for you to call a client who is late. That call could move your invoice to the top of the pile, especially if it is your third or fourth call and the customer is getting tired of fending you off. You should have a policy for when you will send a “collection letter” and when you will turn an account over to a collection agency. Do I have to say that you shouldn’t keep shipping if the customer isn’t paying? If your COD policy isn’t working because when your delivery shows up there’s no cheques, hold all further orders until the account is paid in full.
Keep in mind that customers may have set dates in the month when they pay invoices. Find out what they are and build those dates into your collection procedures. If you don’t you could miss a customer’s cheque run and that might mean waiting another month and that directly affects your cash flow.