Eighty percent of small business owners receive late payments for services rendered, a 2011 survey by PaySimple found. When money is late coming in, it directly affects the small business owner’s cash flow and can negatively impact inventory, and the ability to pay operating expenses and make payroll. Of course, it doesn’t help the owner’s mental health either! Taking charge of your cash flow and minimizing late payments means more cash on hand to grow business. By working through these six steps, you will build up financial management skills that can help improve your cash flow and all aspects of your business.
1. Develop a Cash Flow Chart - A cash flow chart is critical to identifying how cash flows in and out of your company, finding areas that need improvement and staying in the black. List all recurring, variable and one-time expenses, then project your sales, as the SBA suggests. While you may find this challenging at first, you will get better at predicting income after a few months of practice.
2. Stay on top of receivables - As a small business owner, you may put off following up with people who owe you money because you are too busy, you dislike bothering people and you forget to think about receivables until your account balance runs low. Improve receivables by offering discounts or incentives to early-paying customers, offering an automatic bill pay option and schedule follower on your calendar. You may be able to accept payments directly within your accounting software, according to Intuit small business accounting software. This streamlines receivables with other financial management basics.
3. Automate your bills - When possible, set up online bill payments so that all of your bills are paid on time. Not only does this help you avoid late fees, it puts you in control of when bills are paid. Stagger payments out over the month to avoid a mid-month bank account drain, or pay each on the last date it is due to maximize cash in the pipeline.
4. Identify local (or fast) suppliers - Especially when starting a business, determining how much inventory to carry can be challenging. SBA.gov recommends ordering as little as possible when starting out (or when testing a new product or service). Select a supplier who is local or can deliver goods quickly over one who offers a cheaper price but requires more lead time. This way, you can retain more of your cash flow without compromising your inventory or your ability to deliver.
5. Know where to go for help before you need it - If you’re having a bad month or you need funds to fix business equipment, a small business loan can help. Before you’re in an emergency, identify nearby sources of funding including small business loans, business credit cards and lines of credit. Consider applying for a business credit card or a line of credit for “just in case” emergencies, so you do not have to use personal funds to support your business.
6. Build up your cash reserves - As your business grows, set aside cash reserves to draw on during slow months or for unforeseen expenses. As a general rule of thumb, SBA.gov advises that you set aside 3-6 months’ worth of expenses.
Sheryl Ray is a venture capitalist who has an eye for businesses with potential.