Cash flow is the life blood of every business. All businesses should focus on it, even the most profitable. But if you run a seasonal business, are in the start-up phase, are growing rapidly, or are in financial difficulty, you’ll need to pay particular attention to your cash flow. The following are key actions you can take to improve it.
1. Budget your cash flow and track it
If you can measure your cash flow, you are in a much better position to control it. Prepare an eight-week rolling cash flow budget that includes your receipts, disbursements and cash on hand. Ideally, cash should be tracked daily and your budget updated. This period is short enough to provide a good level of detail, but long enough to allow for corrective action to be taken if a shortfall is projected. For example, in the event of a forecast cash flow crunch, you may be able to delay your vendor payments and accelerate your customer receipts.
2. Implement clear customer credit policies and procedures
You should ensure that you have specific policies and procedures with respect to the amount of credit you extend to new or high risk customers. Communicate these clearly to your customers and obtain retainers or deposits whenever possible.
3. Invoice customers promptly and resolve payment disputes quickly
If you have a 30-day payment policy, the clock normally starts ticking only when the invoice is sent. Therefore, you should invoice immediately after the work is done, ensuring that the invoice is sent to the correct customer contact. In this way, you are also sending a message to your customers that prompt payment is important. If you send a message to your customers that you don’t care about timely invoicing, why should they care about timely payment?
Likewise, monitor overdue accounts, establish procedures and policies for each step of the collection process designate a dedicated collections person. Payment disputes, which will occur even in the best of times, should be resolved immediately.
4. Link short term funding with short term assets and long-term liabilities with long term assets
When necessary, lines of credit (short-term funding) can be used to cover short-term liabilities, such as accounts payable. However a line of credit should not be used to cover long-term liabilities such as buying machinery, or developing new products or markets. Where payoff is months or years into the future, you may be short of cash when your short term liabilities come due and end up with one less payment tool at your disposal. Long-term assets should be funded by long-term funding such as bank loans or from business profits retained.
5. Take advantage of cash discounts
Consider using your line of credit or cash reserves to make early payments to suppliers and service providers to take advantage of early-payment discounts.The value of these discounts often exceeds the interest paid on a line of credit.
Conversely, whenever possible avoid paying penalties and late payment charges on tax and utility payments.These penalties are generally much higher than the interest on a line of credit.