Managing Your Cash Flow

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 affects how much you can take home to the family coffers, your need to borrow and your supplier relationships.

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.

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 may 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.

Send 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 with 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 better 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.

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. Don’t make the discount too big: a 1-1.5% discount is more than adequate.  And 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.

2. Pay on time, but no sooner. When you are managing a growing company, you have to watch expenses carefully. Unless you get a discount for doing so, don’t pay early. While a lot of people believe in staying ahead of bills, that’s poor cash management. Keep your money in your hands as long as you can so that it is either offsetting your own borrowing or earning interest for the company.

If you can, use electronic funds transfer to make payments on the third-to-last day a bill is due – to allow for processing time and avoid late fees — so you remain current with suppliers while retaining use of your funds as long as possible.If your business involves travel, use a business credit card. Since most cards come with a grace period, it’ll mean you don’t have to pay until 15-21 days after receiving the statement.

3. Reconcile every month. Many people neglect to reconcile their monthly business bank statements because they assume that banks never make mistakes. They do. If you don’t reconcile monthly, you won’t catch their mistakes.

4.  Don’t keep too much cash in your account.Know how much cash you’ll use in a month to deal with your payables, your payroll and to keep a small float. Everything else should be put against your line of credit if you are using that as your financing option. If you’re not using credit, invest the money to earn some return.

5. Manage your inventory. Everything sitting on your shelves represents money that’s tied up. Stocking up may feel good but it’s a cash flow killer. If you get a better deal buying in bulk, weigh your savings against the money you will have tied up in inventory. If it’s tied up for more than 90 days, that’s too long.

Gail Vaz-Oxlade-WebGail Vaz-Oxlade is a bestselling author and host of ‘Til Debt Do Us Part’, ‘Princess’, and ‘Money Moron’.  Join her as she shares the lessons she has learned from her own experience as an entrepreneur as well as financial best practices and tips to weather changes in the economic environment during the Keynote Luncheon at the Newfoundland and Labrador Organization of Women Entrepreneurs 2014 Annual Conference on Thursday, April 3.  You can also check Gail out on her own blog, on Twitter, Facebook, and on her website.


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