Next to a business plan and a mission statement, cash flow management is one of the most important elements of small business success. With well-managed cash flow, a small business can more easily handle surprise expenses or a slump in sales.
“Proper cash flow will keep the business running when there are mismatches in receipts and disbursements,” says San Diego, California-based CPA Thomas E. Huckabee. “If you’re losing money, you’ll be okay until you start making money.”
To ensure stability through your business’s peaks and valleys, follow these tips:
1. Understand your breakeven point
Your breakeven point is the minimum amount of sales you need to pay your expenses. Knowing your breakeven point helps to project future cash flow. It also will show you when your sales equal—or surpass—your expenses.
2. Monitor often
Huckabee recommends that businesses develop a 12-month cash flow projection at least once a month. A cash flow projection lists cash revenues, disbursements, and identifies cash surpluses and shortfalls before they happen. During lean times, businesses may want to monitor on a weekly basis. Create an annual cash flow projection for years two and three to prepare for crises before they happen.
An international survey of B2B payment behavior from credit insurer Atradius reported that United States businesses lose 51.9 percent of their receivables value when not paid within 90 days of the due date. To improve your receivables, use the following strategies:
• Take deposits from customers when you take the order or sign an agreement.
• Take credit cards. “You may lose two to four percent in transaction fees, but you get money in the door faster,” says Huckabee.
• Establish a collection policy—and follow it. Outline when to make the first call about a late invoice, when to follow up, and when to send an overdue invoice to collections.
4. Don’t pay bills early.
Pay vendors as close to the due date as possible without risking late fees. “If you’ve got cash in your bank account, you can make different choices than if you don’t,” says Huckabee. Take advantage of early payment discounts if you have strong cash flow. If you’re in a tight spot, try to extend payment from Net 30 to Net 45 when possible.
5. Plan for shortfalls
With accurate cash flow projections, you can identify times when shortfalls occur. Plan for these times. Keep some cash reserves in your bank account. Talk to your bank about a loan or line of credit before a shortfall occurs. Ask vendors and suppliers for an extension where you can.
6. Be honest with yourself
If a new client insists on taking 90 days to pay, and the delay will hurt your cash flow, find another client. If you have to send an unpaid invoice to a collections agency, don’t work with that customer again. “That’s one of the hardest things for business owners to do,” Huckabee says of turning away a customer. “But for good cash flow, you have to stick to your policies.”
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Top 5 Cash Flow Management Best Practices