You want more cash in your business, right?
Cash flow management is an important tool when growing your company. When done right cash flow can lead to huge successes. In its essence, cash flow management is when you delay paying out as long as possible while simultaneously seeking to bring in as much money owed as possible.
Incoming Payment Strategies
It’s important to collect the money that is owed to you, but this is not always a seamless task.
Follow these suggestions to improve the rate at which you receive payments:
- Offer discounts to incentivize customers to pay their bills quickly.
- Request deposits from customers on their orders at the point of sale.
- Use credit checks to ensure that new customers have the funds to pay.
- Create an organized invoice system that tracks payments and flags those that are late in paying.
- Consider the changes in your revenue model. If you have started offering a 15% discount to new customers, consider its impact on your cash flow.
- Be conservative with your cash flow projections.
Outgoing Payment Strategies
Along with ensuring that cash comes in steadily, be vigilant when it comes to cash going out. Expenses can creep up, and it is important to control them and, if necessary, cut them.
Online banking is a safe, reliable way of making payments, so schedule payments on the last day that they are due. This will allow you to avoid any late fees while being able to use the funds as long as possible.
Use the entire waiting period for payments. Pay on time, but don’t pay sooner than you must.
Create relationships with your suppliers. By being open and honest, they might be more compassionate if a payment needs to be delayed.
How to Create a Cash Flow Model
A well-organized business will have multiple cash flow models, all of varying lengths of time. These projections will allow you to forecast any upcoming losses and enable you to mitigate them.
To begin with, total up all of the cash that you currently have within the period of time you want to focus on. Take into account all revenue streams. Be detailed; even interest earnings, which may be minimal, count as revenue.
As with your revenue streams, make a detailed list of all expenses. Again, add up everything, including office supplies. When in doubt, round up to ensure that you have no unexpected costs.
With these two amounts, you can begin to see when you’ll be making money and if you’ll be losing money. This is why data for different periods is important: it allows you to plan when it is ok to make larger, needed purchases, and when to save up for leaner times.
Here are a few books that should help you with your cash flow management:
- Rich Dad’s CASHFLOW Quadrant: Rich Dad’s Guide to Financial Freedom.
- Consistent Cash Flow.
- Cash Flow For Dummies.
If you do anticipate times when your income will be at a negative, there are some actions that you can take.
- Apply for a line of credit from a banking institute before you need it so that you can be approved for a lower interest rate. You can take money out when you need it, and pay it back on your terms.
- Pay the necessary bills, like payroll and important suppliers, first, but ask those you have a trusted relationship with for an extension.
Take the following steps to better cash flow in your business:
- Establish clear payment terms. If you don’t start off knowing what your payment terms are, you won’t know when you will get paid.
- Prepare and maintain a cash flow forecast.
- Invoice fast. This one is in your own hands. The faster you send out those invoices, the faster you get paid. We use Freshbooks to invoice our clients.
- Give people multiple options to pay your invoices. Give at least two payment options, check and credit card.
- Offer fixed rate services, to ensure regular payments. Many service companies from web designers to IT support companies only offer fixed monthly service contracts.
- Introduce direct debit payments. You could offer a block of hours paid in advance.
- Use technology to manage cashflow. In our business, we use Freshbooks. It is a great online invoicing system.
- Do not lose focus on cash flow for profit. Yes, profit is important, but your business won’t survive without cash.
- Make someone in your company responsible for monitoring your cash flow. If you have a very small business, hire a virtual assistant to help you with this task.
- Make sure your back offers some sort of an overdraft or credit service in case you are having cash flow troubles. Only work with banks that help you with cash flow problems.
The SBA also has a great article on managing small business cash flow, be sure to check it out.
The bottom line
Understanding your cash flow can be a daunting experience. It opens your business to scrutiny and leaves nothing hidden. But by examining it fully, you can ensure that your business is run successfully, even at times when loss overtakes profit.