Determine how you want to handle late or non-pays before they arise, document your decision into policy, and stick with your policy. Just as you want customers to pay you, your vendors want payment as soon as possible.
However, early payment to vendors can hurt your cash flow and should be avoided if possible. Delay payment as long as you can while remaining consistent with the terms of the sale. If there is no penalty for late payments, set a pay cycle of 45 to 60 days from receipt of an invoice. While slowing the outflow of cash is important, it's equally important to maintain a good credit rating and cordial relations with critical vendors.
Be aware that slowed payment might result in prickly contact from the affected vendor. In those cases, be vigilant that you make all future payments as promised. If you are forced to delay payments, contact the vendor as soon as possible with an explanation and a plan to become current on your debt. There are a number of methods to increase cash flow, especially if you sell custom products or engage in extended contracts. If you work with contracts, set up payment schedules and amounts that parallel or exceed your sunk costs.
If your customer demands modification of standard products or services that have not been identified in your contract, seek additional payment through fees or change orders. Small businesses that provide a regular service or product should consider subscription sales whereby customers prepay. Newspapers, magazines, cable television, landscaping, and pool maintenance are examples of products and services that lend themselves to a subscription model. In addition to receiving upfront cash to cover future costs, you have the advantages of securing future sales and easier resource scheduling.
Layaway programs have come back in vogue as an alternative to sale and payment plans. A layaway program allows customers to select a specific product, which is then reserved for a future purchase and delivery when payment has been completed. This allows the seller to have use of the cash prior to incurring the product's cost. Special accounting treatment of the cash received is required, so be sure your accountant is aware of the program. Consider taking credit cards to ensure timely and probable payments, as well. If you elect to do so, raise your prices to compensate for the extra costs and give those customers who pay cash a discount equal to the fee that would be paid for a credit charge.
The combination of cutting or avoiding expenses overall and delaying payment as long as possible reduces demands on cash.
Strategies to reduce cost include the following:. Maintain a positive cash flow by keeping a close eye on accounts receivable and accounts payable. We touched base on accounts receivable above 2 , but what about accounts payable? Small business owners usually learn two principles early in the life of their companies. Building and keeping an adequate stockpile of cash provides maximum opportunity and flexibility to any business while enabling its owners to sleep soundly at night.
Small Business Cash Flow: Strategies for Making Your Business a Financial Success by Denise O'Berry
For more Cash Flow news check out our most recent blog post. Skip to main content. Sign Up. BACK to the Bill. What is Cash Flow? Why is Cash Flow Important? Tips to Improve Cash Flow Converting sales into cash as quickly as possible, while reducing and extending your payments to build a cash cushion, is the basis for long-term, sustained growth, whether your company is large or small. Anticipate Future Needs Avoid surprises. Build Connections With Lenders The odds of being able to borrow cash or entice investors to put more money in your company when you absolutely need it are low.
Bankers generally make secured loans on such assets as the following: Accounts Receivable. The balance due moves up and down as AR varies: When sales and AR increase, the bank advances more cash on the line; when sales and AR decrease, you're expected to make a payment to bring the loan in line with the negotiated loan-to-AR ratio. Lenders generally like inventory as it's expected to be sold and turned into cash. Bankers generally prefer finished or raw inventory since it's most marketable in the event of default. Many bankers don't lend on in-process inventory as additional investment is required before it can be sold.
Like an accounts receivable loan, an inventory loan moves up and down as inventory levels change. While technically not a short-term loan, owned equipment in good condition can secure a fixed-term loan for a single shot of cash in an emergency. Remember, however, that the more specialized the equipment, the lower loan-to-value ratio you may receive. For example, a Ford is likely to have a higher loan ratio than a variable drill press or a customized trailer.
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.
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.
How to Maintain Positive Cash Flow in Your Business
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. Create relationships with your suppliers. By being open and honest, they might be more compassionate if a payment needs to be delayed. Even if a company is making a profit, by making more revenue than it incurs in expenses, it will have to manage its cash flow correctly to be successful.
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The cash that a company generates from its operations is tied to its core business activities and provides the best opportunities for cash flow management. Areas that offer possibilities for better cash management include accounts receivable , accounts payable, and inventories. That is why it is important to have a credit policy and follow up on tardy payments.
Strategies for business cash flow management
On the other hand, when it comes to accounts payable , it is better cash management to pay suppliers later rather than earlier. As well, it is important not to have too much cash tied up in inventories, but to have on hand just enough inventories for the immediate needs of the business.
There is a right balance between having too much cash on hand, out of precaution, and having an inadequate supply. If a business has too much cash, it is missing out on opportunities to invest the cash and generate additional earnings. If the business expects to generate a better return on its investments than it pays in interest on its borrowings, it might decide to invest its surplus cash and borrow any additional money it needs for its activities.