Cash flow is the life blood of a company. The profit and loss statement may show a profit but it’s the cash flow that makes all the difference. Cash may be tied up in receivables or inventory and that will make it difficult to pay your vendors, pay previously incurred loans or plan for future growth.
For small businesses, cash flow is especially critical as you rely on your customers to pay their invoices in a timely manner. If cash flow suffers for any length of time, a small business could eventually go bankrupt.
In looking at the cash flow issue, we need to look at both sides – the receipt side and the payment side. Successful cash flow management requires the acceleration of incoming payments and the slowing down of outflows.
How to manage and accelerate your receivables
- Offer discounts for early payment by customers. This will motivate some customers to accelerate their payments.
- Ask for deposits on incoming orders, thereby getting some cash up-front. This is especially critical if you are “manufacturing to order” or if you need to purchase stock specifically for a job.
- Invoice customers promptly, as soon as work is done or product is shipped, and continue to monitor receivables to make sure you timely receive your payment. Many consultants fall into this trap; they get so busy with work that invoicing customers is not a priority.
- Require cash on delivery (COD) for customers with a record of slow payments. You may be tempted to drop them as customers but this would be a better alternative.
- To reduce the risk of taking on high-risk customers with poor credit histories, make credit-checks of all non-cash customers. If they don’t meet a pre-determined credit standard, you can refuse to do business with them, or require COD payments.
- Accept credit cards. Although there is a fee to accepting them it may not be as large as you think so shop around and see if it’s an option. Accepting something like PayPal will also give you the benefit of accepting credit cards without the monthly fee.
I hope you now have some ideas on how you can accelerate cash into your business. Next we’ll focus on Managing your Payables in Part II.