How to Manage Cash in a Developing Business
If there’s one just one thing you need to know about small business finances, it’s that cash is king! Whether you’re a solo entrepreneur with a new eCommerce site or a veteran business owner with dozens of employees, healthy cash flow is crucial to your success.
If you have a business that’s thriving – Congratulations! You’re in the minority. Over 60 percent of all new businesses fail within the first five years. For at-home businesses, the percentage is even higher. Why the poor success rate? In the vast majority of cases, it boils down to poor cash management.
Too often, promising entrepreneurs neglect their cash flow. Then, they’re caught off guard when the funds dry up, and they can’t pay their bills. The outcome is inevitably a return to the daily 9 to 5 grind.
This sounds a little dire, doesn’t it? Well, the good news is that you can learn to manage cash flow to minimize your chances of being a small business statistic.
It all starts with understanding three core principles of cash management.
1. Get money as quickly as possible from your customers
2. Pay bills as late as possible without being overdue
3. Manage cash through a single bank account to stay organized
Let’s delve into these principles a little deeper.
Speed Up Your Collection
You’re in business to make money, so it makes sense that you should ensure that you’re getting it in an expeditious manner. This means establishing some policies and procedures that can speed up the collection process.
First, you’ll want to be proactive about sending customers their invoices. Instead of invoicing once a week, take this up a notch by sending out invoices the same day goods are shipped or services completed. The longer you take to invoice, the slower you’ll be getting paid.
Your invoices should clearly state when payment is due and what the penalty interest is for those who pay late. Consider what terms you’ll be offering based upon what is standard for your industry. Whether their payment is in full upon receipt of goods or net 60, your terms should make sense and be clearly stated. One way to incentivize your customers to pay on time or early is to offer them a discount in their terms such as giving them a three percent discount on their invoice if they pay before the due date.
Quickly Deposit Checks
Do you have checks coming in on a regular basis? Great! Don’t sit on them for days before heading over to the bank. This is lost time in terms of your cash flow.
The best strategy is to get into the habit of depositing checks on the same day that they’re received. Most banks do not release funds on a check for several days. This is why it’s important to get checks deposited as soon as possible.
You will also want to ask your bank the specifics on how long they hold deposited funds before they release them. Often, they’ll give vague availability guidelines from one to five business days. Ask them for their specific availability schedule so that you can determine if your funds are being released as they should be and so that you’re not caught off guard if a check remains on hold for multiple days.
Tip: You’re better off going into a bank than using a bank’s ATM to deposit checks. An ATM only gives you a receipt that shows the time and dollar amount of your deposit. By handing checks to a teller, you’ll typically get funds released sooner, and you can minimize any chance of a bank error.
Your bank will also have a deadline for receiving availability on deposited checks. This deadline varies from bank to bank, so you’ll want to ask and keep this time in mind as you get into the habit of regularly depositing checks.
Develop a Strict Accounts Receivable Policy
Not every customer is going to pay on time. It’s just a fact of life and a part of doing business. However, you can reduce your chances of being burned by a late or non-paying customer by doing some preliminary due diligence when you establish your relationship. In other words, don’t wait until it’s too late to find out about a customer’s history of payment. By getting references and even checking credit, you can find out a lot about a new customer.
If all checks out, you may want to offer terms. However, don’t be too generous, especially in the beginning. And you will want to make it clear that you do charge a late fee for ALL customers who pay late and charge back customers who take discounts after the discount period ends.
No business owner enjoys chasing money, but if you have a late paying customer, it’s sometimes necessary. Make it a policy to follow up diligently with all late payers every time they are late. Consistency is essential. Begin with an email or a phone call on the first day that they are late. Then, start to escalate the collection process by sending a formal letter.
If they are in excess of 30 days late, it’s time to bring out the big guns. This should include a letter from your attorney, turning the account over to a collection agency, and finally working with a collection attorney to obtain what is owed to you.
Do you have a late paying customer who continues to order more from you? If yes, you’ll need to cut them off until they can pay. Remember: Bad debt is bad for your business.
Slow Down Your Bill Paying
While you want to get paid from your customers as quickly as possible, you should pay what you owe not a day sooner than you have to unless there is a financial incentive to do so. Some business owners choose to always stay ahead of their bills and to pay them early if possible. But this isn’t the smartest cash management strategy. The goal should always be to keep your money in your pocket as long as possible.
To slow down your rate of disbursement, pay your invoices on the last day they’re due and not sooner. Ideally, pay mail payments on Thursday or Friday to gain a few extra days over the weekend.
Using a business credit card can buy you more time, too. By charging travel, lodging, meals, and small expenses, you will get up to an additional month of time before having to pay for these items. This float time can be invested.
Don’t Keep Extra Funds in Your Business Bank Account
Banks are in business to make money, too. This is why they encourage you to keep higher account balances by offering you free bank services. Perhaps, you’ve done this. By keeping $5,000 in your checking, you could be saving yourself $10 a month on bank fees. But at what cost? Could that extra money be better invested elsewhere? It’s worth your time to take a close look at the minimum balance requirements on your accounts and what you’ll have to pay if you don’t meet these requirements. From there, you can determine if it makes sense to keep the funds in your account or to invest them elsewhere.
You can ask for an account analysis statement which shows you how much your bank is charging for services like account maintenance, checks, and wire transfers. You may find that you’re overcompensating the bank.
Tip: A bank account analysis should be free since it is actually an invoice from the bank for services that they are charging you. Don’t let them charge you for this!
Keep Inventory Low
If you think about it, each product you sell will become cash in your bank account at some point. However, as inventory, it’s hindering your cash flow.
Healthy cash flow is contingent on moving inventory quickly. A few ways to accomplish this are to
·Forecast as accurately as possible how much you expect to sell each day, week, and month.
·Identify which items in your inventory sell the fastest. Minimize ordering other items that do not sell as quickly.
·Evaluate how long it takes you to get inventory in stock from the time you order it to the time it’s on your shelf. Order inventory as late as possible.
·Continuously shop for less expensive inventory, and don’t hesitate to negotiate with your suppliers to get the best possible pricing on items you’re buying from them.
·Sell off obsolete inventory even if it’s for just pennies on the dollar. Some cash flow is always better than none!
Seek Out Continuity Sales
One of the best ways to manage business cash flow is to obtain customers who will pay for products or services on an ongoing basis – usually monthly or for a fixed period of time. A subscription model for a service business is one way to achieve this.
Continuity can work for nearly any type of business. Structured payments can be an excellent way of controlling and improving cash flow over an extended time frame.
Use the Right Type of Funding
Nearly every business will need a little extra cash at one point or another during its growth phase. Knowing the right type of funding is essential. For large purchases that don’t immediately improve the bottom line of a business, a bank loan might be the best option. Businesses that are just launching may consider angel investment or loans from friends and family. And growing businesses that are in need of quick funds to hire staff or to buy inventory can take advantage of a Kabbage Line of Credit, which provides funds in a matter of minutes.
Get Help If You Need It
Finally, it’s important to remember that you don’t win a prize for trying to manage every aspect of your business yourself. Many business owners try to wear every hat in their business, and often this is a big mistake. Not everyone is cut out for managing cash flow. If you’re one of the individuals, consider handing off this job to a friendly bookkeeper, accountant, or assistant who can help you stay organized and focused on what you best – growing your business.