Many small businesses can improve their cash position simply by making certain that their billing, collections, and payables systems are operating as efficiently as possible. Small businesses do not have the luxury of large accounting and collection departments of big corporations so they often have their bookkeeping done by an external bookkeeper. More so if you are a home-based entrepreneur working solo! First, get your customers to pay you as soon as possible! To the extent possible, adopt the business practice of requiring up-front deposits when making sales. However, if the account payment is a receivable, then make sure that you actively manage its collection by billing promptly, aggressively following-up on overdue invoices (which can be handled in some cases by your bookkeeper), and quickly collecting on overdue accounts. You stand to lose revenues if your collection policies are not aggressive. The longer your customer’s balance remains unpaid, the less likely it is that you will receive full payment.
Tightening credit requirements:
If you think that you offer the best product or service relative to your competitor, you can obtain the best possible credit conditions. Be sure to tell your potential customers upfront your credit terms - before you provide your product or service. To improve your cash flow position, you can be more stringent in your credit and terms, requiring more customers to pay cash for their purchases. This will increase the cash on hand and reduce the bad-debt expense. However, there are trade-offs to tightening credit in the short and in the long run. Looser credit allows more customers the opportunity to purchase your products or services. Your bookkeeper should measure, however, any consequent increase in sales against a possible increase in bad-debt expenses. Another way is to get as much information from the client as you can in the form of “customer questionnaire.” The more information you have about the customer, the easier for your payment collection process in the event the person rescinds on the payment.
Taking out short-term loans:
Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are types of credit used in this situation.
Increasing your sales:
Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm’s cash reserves.
Managing Your Payables:
A key strategy in cash flow management is to aim to bring cash into the company as quickly as possible, then hold onto your cash as long as possible by managing your payables. That means, quite simply, take as long as you’re allowed-without incurring late fees or interest charges-to pay your company’s bills. Remember that a bad credit history can stifle your business, so you need to protect yours. Know which vendor you need to pay first. Better yet, negotiate with some of your vendors to extend to your business liberal payment terms.
Investing Your Spare Cash:
If your cash flow has become stable and predictable, you can consider investing your excess cash and earning interest.