The business accounting term “cash flow” means exactly what it sounds like: the flow of cash into and out of your business. Positive cash flow means you took in more than you spent. Negative cash flow means you spent more than you took in. Going negative can be exceedingly painful for any small business.
There are three secrets to cash-flow management: collect fast, pay slow and manage your reserves.
Here are some tips:
Collect fast
- Bill customers immediately for goods you’ve sold or services you’ve provided.
- Offer discounts for immediate or earlier-than-agreed cash payment. Discounts help you collect faster.
- Limit offers of company-supplied credit. Carrying your customers can kill your cash flow.
- Charge a late-payment penalty if customers don’t meet your payment terms. Penalties discourage slow payment.
- Accept multiple forms of payment, such as cash, credit and debit cards and online transfers. Make it easier for customers to pay you sooner.
- Require a 50% deposit for large orders or custom-made products. Collect the deposit before you purchase supplies or hire workers for the job.
- Contact customers who haven’t paid to ensure they pay on time.
- Deposit payments as soon as possible. Uncashed checks don’t help your cash flow.
- Hire a reputable collections firm to pursue delinquent accounts, or sell your receivables outright. Less revenue is better than none for cash-flow purposes.
Pay slow
- Negotiate payment terms that allow you to buy supplies now and pay for them later.
- Take advantage of opportunities to pay suppliers over time.
- Pay suppliers on the last day you can without incurring interest charges or late-payment fees. Charges and fees eat cash.
- Pay employees bimonthly instead of weekly or biweekly. The less-frequent schedule, 24 pay periods per year, reduces payroll processing costs and lets you keep cash longer.
- Buy used equipment instead of new, and keep equipment in good repair.
- Say no to the latest and costly technology. Delay software upgrades as long as the version you’re using is supported.
Manage reserves
- Create a worksheet to project future cash flows. Review projections at least once a week. If your business is cash-flow challenged, review your cash situation daily.
- Start your business with as much cash as you can. Undercapitalized enterprises can run out of cash shockingly fast.
- Build cash reserves to cover shortfalls and unexpected expenditures. Reserves are like an emergency savings account for your business.
- Set aside cash periodically to pay sales, income and payroll taxes and other large expenses. Don’t use sales tax you collect as working capital for your company.
- Set up a bank line of credit secured by your receivables or inventory in case your prudent cash-flow management efforts aren’t enough. Being prepared could save your business from a cash-flow meltdown.