Even successful small company can find itself in a cash crunch.
Here’s how to keep the money flowing
By Mike Robbins

You’ve done the work, but when will you get the reward? If you don’t quickly collect the money your company is owed, you’re providing interest-free loans to your clients—and robbing your firm of the cash it needs to flourish. Unfortunately, collecting that cash isn’t always as easy as it should be. A 2006 VISA survey found that receiving and collecting payments is the cash management issue that small business owners find the most challenging.

The key to receivables is understanding the policies of your client’s payables department,” says Ruth King, CEO of BusinessTVChannel.com and author of The Ugly Truth about Small Business (2005). “Does your new client require a supervisor’s signature on all invoices? Do they have special rules for large invoices?”


Make a friend in the client’s accounts payable department. If something goes wrong you won’t have to ask strangers to sort it out. And remember that if you fail to follow a customer’s billing rules to the letter, you might not even get a call warning you there’s a problem—many companies will simply file your flawed invoice and wait for you to figure out that something’s wrong. Their payment process won’t even begin until you resubmit an amended invoice, perhaps delaying your money for months.

Always get invoices out the door as soon as possible. Rapidly growing companies often are so busy getting their jobs done that they treat sending invoices as a low priority. But clients won’t pay your invoice until 30... 60... or even 90 days after they receive them, regardless of when the work was done. Each day that you wait before sending out an invoice brings your company one day closer to running short of cash.

Your invoicing responsibilities don’t end when the invoice goes out your door. If the contract says the client has 30 days to pay, pick up your phone on the 31st day and politely ask the client where your money is. Failing to follow up on overdue invoices won’t just slow your cash flow. It could cripple your lines of credit. Once invoices slip past 60 or 90 days past due, lenders start to question whether these bills will be paid at all, and might not allow you to borrow against this future income. Be particularly persistent about following up on late invoices in the summer, suggests Mills. Invoices are likely to fall between the cracks when employees in clients’ payables department and your own receivables department are on vacation. When invoices are paid, deposit checks immediately.

If a client is financially unable to pay your bill, keep the conversation friendly and try to set up a payment plan, even if that means you have to settle for a few hundred dollars a month until the client’s company is back on its feet. “This isn’t a perfect solution,” notes King, “but it’s better than calling in the lawyers.”


The first rule of payables: don’t— until you absolutely have to. If you agreed to pay in 30 days, wait 30 days; if you agreed to pay in 60 days, wait 60. “If you’re late, just be honest,” advises George Cloutier, CEO of American Management Services, a small business turnaround consultancy. “If they call and ask about their money, say ‘We’re cutting your check on Friday.’ Don’t say ‘It’s in the mail,’ if it isn’t.”

Get to know the credit managers at your major vendors, and find out what they need from you to keep your credit terms attractive. Expect most vendors to be more interested in your credit worthiness than whether your checks tend to arrive a day or two late. “Vendors are much more sophisticated about credit than they were even ten years ago,” says Mills. “If you have a bad financial statement, or are just late with a financial statement, some vendors will be very quick to change your terms. Where you once had 30 days to pay, you might now be C.O.D. That can create a severe cash flow problem.”

Payroll is the single largest recurring expense for many small firms, and even successful companies can find themselves without enough cash to make payroll when their receivables vary dramatically from month to month. Cloutier suggests paying employees commissions based on performance whenever possible, to help reduce payroll expenses during stretches when sales and revenues are low. Pay salaries semi-monthly rather than bi-weekly if your revenues come in monthly. “It seems like a small thing, but if you pay every two weeks, there are two months every year that have three pay periods,” says King. “That third one can be a killer if your clients pay by the month.”

A significant number of small companies unwittingly fail to pay all the payroll taxes and overtime wages they’re supposed to, according to Greta Cairns, Vice President of Human Capital Development at SCI Companies, a professional employer organization. Then tax time rolls around or government auditors appear and between the payments and penalties, these companies face major cash crunches.

Should a temporary cash flow problem leave your company unable to pay its bills, contact your vendors as soon as you learn there’s a problem, explain the situation, and try to work out a payment plan. “Ninety percent of vendors will let you do this, if you have a good credit history,” says Cloutier. “It’s a lot better than hiding the problem and surprising them with the news that you can’t pay when your payment is already overdue.”

You might also consider tapping a line of credit from your bank. A good banking relationship can make a world of difference when a generally profitable business suddenly runs short on cash. To build solid relationships with your lenders, get in the habit of sharing all of your company’s financial news with them, even the bad news. If you’re going to have a slow quarter, explain why. And bear in mind that banks don’t just look at your business when deciding whether to loan you money, “They’ll also look at the business owner’s personal credit history,” says Vargo. “If you carelessly make late payments on your credit card, your business will suffer for it.”

Providing your customers with easy payment options is an important consideration for small business owners. “The public is becoming comfortable with being able to pay for goods and services with a wide array of different means,” says management consultant Mike Rosen of Rosen & Associates. “Increasingly people expect to be able to use credit and debit cards at pretty much every point-of-purchase.” If your business is restricted to cash or check payments, it will hurt your competitiveness.

Establishing merchant accounts with credit card vendors will cost you in terms of the fees charged for each type of credit or debit card accepted. However, Rose says that those fees must be considered a cost of doing business in the modern marketplace and should be balanced against the potential cost of business lost because of customer inconvenience. “If a customer finds that he or she can’t use the credit or debit card they usually use elsewhere, they may go elsewhere. If you offer your customers few choices in payment, expect fewer sales.”

Rosen notes that cash and checks are declining in use relative to plastic or electronic money, and that small businesses will have to cope. “Setting up a merchant account to receive credit card payments used to be a hassle,” he says. “But today there is great competition among banks and financial services companies to provide such services, so it has become much easier for a small business to set up credit card processing and electronic payment services.” Rosen suggests shopping around for the best fees and array of services. Membership in local small business associations and chambers of commerce can also result in discounts on merchant account fees.

If your business operates a web site, you might consider an online payment service. Opening a online payment account is relatively easy and permits your business to receive payments via credit cards, electronic checks, and direct account transfers. There are merchant fees associated with such payments, but with online sales becoming an ever-more important arena for small businesses, accepting payment online will only become more of a competitive necessity.


Track the cash balance in your corporate checkbook on a daily basis, suggests
George Cloutier of American Management Services. And don’t give check-signing privileges to anyone else. If you sign every check yourself, you’ll always know about every dollar your company spends.

Small business owners must avoid the temptation to treat themselves to luxuries when their businesses appear to be on the road to success.

Mike Robbins is the author of The Smart Guide to Planning for Retirement (John Wiley & Sons) and has written for numerous magazines such as Moneysworth, Mutual Funds Magazine, and the Forbes family of publications.

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