Managing Cash Flow for Small Businesses Rated:

Maintaining a healthy cash flow is one of the most important aspects of running any small business. Key to success in this area is the management of inflows and outflows, which can be monitored using a financial software package.

Analyzing cash flow

Before you can begin to improve your cash flow management, you should obtain a detailed view of how your company manages cash. Look at areas including accounts receivable, accounts payable, credit terms and inventory.

If you find that there is an imbalance between money coming in and money going out - for example, if you have more unpaid purchases than sales coming due - this may result in a cash flow problem during the next month.

Once you have analyzed cash flow, you can begin to look for ways to improve cash flow management. In very basic terms, your goal is to speed up inflows and delay outflows as long as possible while still meeting all of your financial obligations.

Improving accounts receivable

Accounts receivable make up a large proportion of the cash coming into a small business, so keeping a close eye on them is vital to improve cash flow. Collecting money may not always be easy, but there are steps you can take to ensure you don't find yourself with a cash flow crisis due to slow payments.

Stay on top of payments. Awareness of when customers' payments are coming due is very important and you can use your financial software to stay ahead of the game. Generating an accounts receivable aging report to track the habits of your customers over time will help identify which ones are likely to need to be prompted to pay.

Make it easy for them to pay. Similarly, make sure you have been prompt in your issuing of invoices. If customers regularly receive their invoices in a timely manner, you are more likely to receive your money quickly.

Ensure that customers know exactly when payment is due by indicating it clearly on the invoice. Give them easy and fast options for payments, such as fax and online methods.

Many owners have successfully accelerated accounts receivable collections by offering discounts to those who pay early.

Institute a credit policy. When and how do you make credit decisions about your customers? The sooner you do so, the faster you can bill them - and the faster you will get paid. Try to anticipate customers' credit needs before they ask.

For new customers, you will probably want to require a credit check and several references, a process which can be initiated ahead of their first order to speed things up. You could also consider asking for a small deposit on new orders, to make sure you have some cash on hand.

Institute a collections policy. Your policy should indicate when you begin efforts to collect on a payment. Many business owners stick to a formal reminder system that takes on a more serious tone as the lateness increases and eventually involves an attorney and, ultimately, a collection agency.

However, you may also decide to tweak your approach based on the particular customer or size of the payment due. A chronic late-payer may require different handling than someone who has slipped up on a single occasion.

Improving accounts payable

It is to your advantage to keep cash on hand for as long as possible, which means carefully monitoring your outflows.

Manage your due dates. Pay an invoice on the day it is due to keep consistent cash flow - paying early can leave you short of cash at a crucial time. You can organize your outflows by arranging electronic funds transfers with your financial software.

Extend your payment times. Speak with your vendors and see if you can work out an agreement so that payments are spread out and payment times are extended as long as possible.

Also consider ways of strengthening your relationships with vendors in case you need to delay payment in the future. Remember that those who offer the lowest prices may not necessarily be the most flexible - take this into consideration when choosing who to work with.

Improving inventory management

Inventory management basically involves monitoring your daily sales activity and making sure your on-hand inventory reflects these patterns. You can use your retail management software to help forecast how demand will ebb and flow throughout the coming months.

A common dictum is that 80 percent of your revenue comes from 20 percent of your inventory. By figuring out which of your products this applies to, you will be able to make informed decisions about how much of a certain item to order - and when.

Inventory that is not being transformed into cash is useless. If you have out-of-date inventory, the best strategy is to sell it for the best price you can.

Many small business experts believe that healthy cash flow is truly the secret to success. Once you have a handle on how to balance your inflows and outflows, you may find you agree.

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Showing 1 - 3 of 4 Comments
M+Dawson | June 11, 2009
Cashflow is critical to my sucess. Loved the article. Anyone that doesn't track cashflow is losing competitive edge.
Milt+Burton | June 11, 2009
Sometimes "good" customers don't pay on time. It's important to monitor the credit status of large customers to know when they are having difficulty making payments and adjust your credit policy for them to prevent them from becoming an boat anchor to your business, dragging it down with them.
Wendy+Weyer | June 11, 2009
Very well stated. May we send this electronically to a few of our clients and give you and the writer credit for the article? Wendy Weyer ClickBase Corporation
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