Whether it is a multi-billion dollar empire, such as Bill Gates’, or the tiny mom-and-pop convenience store on the street corner, cash flow is the lifeblood of any business.
In today’s uncertain economy with ever rising interest rates, many small businesses with limited financial training are having problems staying alive, let alone prospering. In fact, 63% of new businesses don’t survive six years — and most work-at-home people fail within 6 months!
Cash flow is the money that is moving (flowing) in and out of your business in a month. Although it does seem sometimes that cash flow only goes one way – out of the business – it does flow both ways.
- Cash is coming in from customers or clients who are buying your products or services. If customers don’t pay at the time of purchase, some of your cash flow is coming from collections of accounts receivable.
- Cash is going out of your business in the form of payments for expenses, like rent or a mortgage, in monthly loan payments, and in payments for taxes and other accounts payable.
So the big question is: How will you manage your cash flow effectively?
Les Masonson, author of Cash, Cash, Cash: The Three Principles of Business Survival and Success, says cash flow is all about, “getting the money from customers sooner, paying bills at the last possible moment, concentrating money to a single bank account, managing accounts payable, accounts receivable and inventory more effectively, and squeezing every penny out of your daily business.”
Let’s break down Masonson’s tips one at a time.
In your business, you should collect money as fast as you can. To do so, try these four things:
- Try to speed up customer orders by having them fax their orders to you
- Send out your invoices the same day goods are shipped, not a week or two later.
- Indicate on your invoice when payment is due, and specify the penalty interest for late payment.
- Consider using a bank lock box (post office box strategically located near customers to reduce mail time) to collect your mailed checks from customers across the country. You lockbox bank picks up mail around the clock including weekends, processes the checks and credits your account. (Note: this last step is probably more appropriate for businesses grossing more than $25 million annually. You may not be there yet, but keep it in mind for when you get there)
Deposit Checks Fast!
This seems only obvious, but it’s extremely important.
Have a Super Tight Accounts Receivable Policy
Many people think it is no big deal to neglect accounts receivable until bills are collectible. This is bad cash flow policy. Here are seven excellent tips for handling accounts receivable:
- Check the financial health of a new customer before offering them credit.
- Ask a new customer for five business references and don’t neglect to call them.
- Don’t offer too generous discounts, such as 3% for payment in 10 days. A better rate is 1.5% cash discount. It costs you less.
- Charge a “late fee” of 2% per month to customers who pay late and charge back customers who take discounts after the discount periods.
- Follow up on late payers with phone calls and letters.
These may seem a bit extreme, but the first letter should go out the very day the amount is one day late! After 30 days late, start this sequence:
- Send out a letter from your attorney
- Turn over the account to a collection agency
- Use a collection attorney
- Don’t send out new merchandise if bills remain unpaid. Remember that bad debts hurt your bottom line! Be vigilant and try to get at least periodic payments from slow payers.
These steps are tough and unrelenting, but they may make the difference between a positive cash flow month and a sluggish month for your business. It may seem a bit hypocritical to demand swift and exacting payment, and then do what we suggest next. But just remind yourself, all (almost) is fair in love and war and business.
Disburse Your Money Slowly
Just the opposite of collecting at the earliest possible moment, you should never pay a day sooner than you have to, unless you get a discount for doing so. A lot of people believe in staying ahead of bills and paying them as early as possible, but that’s just poor cash management.
Don’t issue advances to employees. Have them use their personal credit cards or business cards, if you provide them
Now, many small businesses neglect to reconcile their monthly bank statements or assume that the bank never makes a mistake. Banks do make mistakes, and you must stay on top of your disbursement to control your cash flow. If you are one of those people who simply can’t stand to balance your check book, you can use a bank’s standard account reconciliation services or accounting software.
No Extra Money in Your Bank Account
Many businesses make the mistake of keeping too much money in their bank accounts to pay for bank services. This money could be used more effectively elsewhere — such as to pay off a loan or to invest at a more competitive rate. Many businesses have no idea how much money to leave in the bank or what alternatives they have to compensate the bank. Take some time to find out what your minimum balance needs to be.
Get an Account Analysis Statement
How do you know how much money (bankers refer to this as “balances”) to leave in your checking account to pay for bank’s services? That’s a question that more business owners should be asking themselves.
- First, get a price list which shows how much your bank charges for services like account maintenance, checks deposited, checks paid, stop payments and wire transfers.
- Ask the bank to send you a monthly “Account Analysis Statement.” The analysis statement contains the average balance levels for the month — both the ledger and the available balance — as well as a listing of services used, their transaction volumes and cost. This statement should be obtained in addition to the regular monthly bank statement.
- Look at the account analysis to see whether you are over-compensating the bank. Then pull out any excess funds and invest them in a high-yielding money market mutual fund, for example.
Inventory is Not Cash
Every item you have sitting on your shelf should eventually be transformed into cash in your bank account, and the sooner the better. As long as it’s inventory, it’s basically dead weight. If it is not moving, you’re not having cash flow.
Here are six recommendations to minimize the cost of your inventory:
- Attempt to forecast as accurately as you can the day, week and month what you expect to sell.
- If you are dealing in more than one item, determine which item accounts for 80% of your sales. Then minimize ordering other items that are selling poorly or infrequently.
- Determine how fast you can get inventory, once you order it. Try to order as late as you can. Some firms can use “just-in-time” inventory which enables them to receive their order the day they need it.
- Determine your economic order quantity and don’t order too much inventory just to save a few
- Shop around and make sure you are getting competitive prices.
- Develop a policy for determining what is obsolete inventory, and how you can get rid of it.
The best way to get rid of dead inventory is to sell it whatever you can get for it, even if that’s only 10 percent of what you paid for it. At least it will generate cash flow.
Don’t Forget Continuity Sales
Once of the most exceptional ways of controlling and improving cash flow well into the future is by employing something called continuity of sales or services. Continuity sales are simply a contract to purchase products or services on an installment basis for a fixed period of time. That may sound complicated, but in practice, it actually is not. The best example of a continuity sale is a magazine subscription. 12, 24, or 36 issues delivered each month for X amount of dollars. The bigger the subscription, they better deal you get. The publisher gets more money up front, and the customer gets a better deal in the long run. Continuity can apply to anything.
Let’s say you own a dry cleaning business. How about an annual deal to clean 5 shirts or blouses per week for set amount of money? Get people to pay your for the entire week up front for a lot of fast cash flow. You’ll trade a discount for getting business, but you’ll ensure a steady cash flow for months to come.
Continuity works with just about any kind of product or service you are offering, from dry cleaning to your personal consulting service.
You can structure payments for continuity sales on almost any basis, but its best by far to go for complete payment up front. After all, the discount is based on a customer’s commitment, and they’ll be a lot more committed with their money on the line.
NB: I think I read this somewhere a while ago… but am not sure which site. I felt it will be good to share. Updated October 2019.
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