Cash flow is the lifeblood of every small business, but more often than not, every company will encounter small business cash flow problems. Whether it’s due to slow-paying clients, unexpected expenses, slower-than-expected sales, a big contract that doesn’t come through or other circumstances beyond your control, you might find yourself short of cash at the worst possible time.
What’s to be done about it? While there are some cash flow problems that are true “surprises” or that are related to larger economic challenges, most small business owners have the ability to implement smarter practices and strategies for managing cash flow. There are several tactics that your business can put into place today that can help you get paid faster, save money, boost efficiency and otherwise put your business operations in the best possible position for ample immediate cash flow and bigger long-term success.
We talked to a few cash flow management experts about how small business owners can get the most out of their cash flow – starting today.
Priyanka Prakash, Finance Specialist at Fit Small Business
Send invoices immediately after a sale is made or a job is complete. From my company’s own experience, sending invoices within 24 hours of a sale increases timely payment by 20-30 percent. This is because the payment is fresh in the customer’s mind.
Offer early payment discounts. A lot of small business owners charge interest or a penalty for late payments, but a carrot often works better than a stick. Incentivize the customer to pay you early by offering small discounts for doing so. A typical discount is 2 percent/10/NET 30. This means a 2 percent discount on a 30-day invoice if it’s paid within 10 days of receipt.
A good tool for optimizing small business cash flow is invoice factoring, also known as accounts receivable financing. Sometimes, no matter how hard you try, some customers will take a long time to pay you. To offset the cash flow gaps, you can borrow money against unpaid invoices. This is called invoice factoring and allows you to get paid now for invoices that are due in 30, 60 or even 90 days.
Another good option is a business line of credit like Kabbage provides. It can serve as a safety net if a customer isn’t paying you when they should.
With interest rates rising a little bit on business loans, cash is tighter for small business owners. We may begin seeing more late payments on bills and more irregular cash flow. All small business owners should have a cushion set aside which allows them to operate for at least two or three months in the case of an emergency.
Richard W. Hayman, CEO Coach and Mentor
You have just one chance to train a customer how you expect to get paid. You must do this with the first invoice. New customers need to know that having an open account is a privilege, not a right. The customer must supply a credit app and sign the credit app and terms.
Before the first invoice is sent, we call the customer to discuss it and explain our credit terms. After the invoice is sent, we call to check that it was received and answer any questions, mentioning again the payment due date.
A few days before it is due, we call to ask if the invoice has been approved and is scheduled to be paid on time. After we receive payment, we call to thank them for honoring our payment terms. If the payment is not on time, we call IMMEDIATELY to inquire.
Basically, we are training the customer to pay us on time. The worst mistake is to wait 30 days or more to call asking for payment. That trains the customer as to what your threshold is for late payments.
We charged and collected late payments from all customers.
For certain very large customers, we needed to extend our normal payment terms to 45 days from the start of the relationship. But for all other customers, all invoices stated NET 10, regardless of the agreed payment terms.
Paul Forsberg, Corporate Business Brokers
One way to get paid faster is to offer discount incentives for payment. If you normally operate with 30 day payables, offer a 3 percent discount if paid within 15 days, and/or a 6 percent discount if paid within seven days, and if you can, offer a 10 percent discount if paid on delivery.
This strategy works well in every industry where there are receivables. If your margins are too tight to offer this type of discount, I recommend you find another product, or break out of the “Commodity”-type business so you can raise your prices. There will always be the cheapest provider, and likewise, the most expensive. Do what is necessary and be the most expensive. It’ll pay off big.
A great tool that I recommend to help optimize cash flow is QuickBooks – this is a a fantastic accounting software program and the online version is mobile friendly.
The most common small business cash flow mistake that I see is careless or non-systematized accounting. For example: a business has a long list of account receivables with lengthy payments, which then turns into a large list of payables that charge interest to the business. Large payables also tend to put the supplier in an advantageous position and they begin inching up prices, which further cut into the business’ profits.
The most common cause of slow cash flow, from what I see, is providing products and services at a discount, thereby tightening profit margins. Participating in discount promotions such as daily deals, Amazon deals, and Groupon ends up creating huge cash flow problems.
The only way to participate in discount promotions is if you have a specific goal in mind, such as collecting customer information so you can sell to them over and over without having to offer discounts. Collecting email addresses, cell phone numbers, birthdays, etc. all becomes a powerful marketing tool that can be used to actually increase your small business cash flow whenever the business owner wants to do so.
Toffer Grant, CEO and Founder of PEX, prepaid debit cards to help small to medium-sized businesses manage employee spending
Use technology to your advantage. The majority of every accounting process can be automated, and accounting software can provide greater detail during an audit. It is vital to have a reliable and user-friendly expense management system in place.
Take a closer look at your invoicing and accounting process. Are you inputting invoices the same way every time? If not, is this causing problems? While this may be a small piece of the puzzle, creating a standardized invoice procedure could help shave valuable time off the process of getting paid.
The goal of improving accounting efficiency is to reduce time spent on operations without increasing errors. Are you doing things one specific way because that’s the way it’s always been done? Even if it isn’t broken, it may be time to fix, or adjust, your accounting practices.
Has your business ever found itself in a cash flow crunch? What was the cause, and what did you do to get out of it? Leave a comment and let us know.