In my experience, there are two top pain points for most small businesses:
- Not enough time
- Not enough money
When I say ‘not enough money,’ I do not necessarily mean that those businesses don’t make enough (though that certainly could be true) but rather, there often isn’t enough money around to do everything that the small business owner may want to do.
The question then becomes, how do you make the most with what you have? The secret is to increase your cash flow. Cash flow is the oxygen of your business – if it is in abundant supply, you breathe well, and if it’s not, your business will begin to choke.
Here are six strategies to help increase the all-important cash flow:
1. Credit checks: Back when I first started practicing law, a seemingly nice guy came into my office. He really needed to file for bankruptcy, and I really needed the business, so I agreed to his unique proposal: He would pay me half of my fee up front and then the other half once we filed. So what happened? He paid me half, I filed his paperwork, and then he let me go and added the remainder of my fee into his bankruptcy.
Lesson learned…the hard way.
Extending credit to those who don’t deserve it is one sure way to mess up your cash flow. The answer to this is to take a stand. You don’t need their business that badly (and I didn’t need his business that badly). Running a credit check before extending credit will help ensure proper cash flow.
2. Find a factor: Even when the customer has good credit, it doesn’t mean they will always pay on time. Then what? Consider factoring. Factoring is an arrangement where a company (called a factor) will pay you for your accounts receivable. You might get, say 95 cents on the dollar, but the good news is that a factor typically pays within 48 hours or so.
3. Get paid faster: It is fairly standard in business to have clients and customers pay Net 30, that is, 30 days after you invoice them. One obvious way to increase cash flow therefore is to get paid faster. How?
- Give customers an incentive for paying sooner, say a 1% discount or something
- Give them a disincentive for paying late, say a 5% penalty
4. Collect past-due debts: It serves no one for you to be the nice guy but not get paid. Deadbeat customers learn that they can get away with not paying you on time and they also set a precedent for you to give others the same courtesy. Generally speaking, the solution is . . .
Don’t do it.
Of course there are times and relationships that require this tactic and that is smart and good business. However, making a habit of it is bad business, period.
5. Get it in writing: Set forth your payment policies in writing and make sure all customers are aware of them going in. Either make it part of your standard contract or have your policies added as an insert to your first billing cycle. And remember, you don’t have to offer Net 30. You could be Net 15, or Pay Upon Receipt. It’s your business after all.
6. Sell excess inventory or equipment: If you have inventory that you have been unable to move, then discount it and get it out of there! The same goes for old equipment in storage or otherwise not in use. If it is gathering dust, it would behoove you to free up the space and generate some cash in the process.
In the end, what you don’t want is to be like me – the guy who is still owed $425.20 years later.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.
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