7 Tips to Improving Your Cash Flow

Copyright 2005 Pam Newman

Cash is King…That is what everyone tells us and it is true!
You cannot function successfully in any business without
proper cash flow. So if this Cash Principle is so well
known, then why is it that so many businesses struggle?
Sometimes the obvious is not always so obvious when you are
entrenched in running the day-to-day aspects of your
business. Here are 7 Tips to Improve Your Cash Flow!

1. Cash and Carry. Operate a cash and carry type business
versus worrying about receivables. The best business plan
is one where customers pay at the time of purchase so you
don’t have to worry about invoicing or collection
procedures. Invoicing and collections take up valuable
time, so you want to come up with creative ways to
incentivize payment immediately. Set the ground rules in
the beginning so your clients know what you expect.

2. Receivables Collection. Collect your receivables in a
prompt manner. Don’t let them hang out there forever until
your customers decide they want to pay you. Being a good
steward of your business is “good business”, so have a
process in place for invoicing and collections. The longer
your receivables are outstanding, the less likely you are
to collect. You don’t have to be mean and rough to collect
promptly from your clients. A good rule of thumb is that
you should always have a due date on the invoice and then
send out a follow-up statement within 10 to 30 days from
the due date. Each industry and business environment has
different insights as to what is the “ideal” time. I would
not send follow-up correspondence any sooner than 10 days
past due. Payment may just be delayed by the mail; however,
waiting longer than 30 days is too long. If you have not
received payment within 45 to 60 days of the due date, then
a phone call should be made to follow-up with your
customer. Accounts that go past due 90 or more days should
be taken to the next level of collections with an outside
agency, internal collection “ninja” or any other mode you
have established for collections. Find what works best for
your business and stick to it. Each day that you are
delayed in receiving payment is an additional cost of doing
business. Time is money.

3. Receivables Funding. Implement an accounts receivable
funding program. Factoring of accounts receivable has
become very popular and it can be a great way of keeping
the cash flowing. Businesses who deal with large businesses
or government agencies lend themselves to utilizing
factoring programs. If your clientele is made up of small
businesses or individuals, you may find it more difficult
to establish an accounts receivable funding program. Why?
Funding companies are monitoring risk. There is less risk
with larger companies or government agencies. Or so they
think!

4. Vendors. Negotiate terms with your vendors to help delay
the outflow of cash payments. Lots of vendors have payment
terms where you can delay the payment until end of the
month or maybe even up to 60 days. This allows you a little
float time to use their money while you are working on your
project. Then hopefully you’ll receive payment from your
customers prior to needing to pay for the products you
purchased. Some companies also go the route of consignment.
Then you are selling someone else’s goods and don’t have
your money wrapped up in inventory. This option can help
you increase your product offerings without having to
invest large amounts of money in inventory.

5. Customer Deposits. Have your customers pay a deposit
prior to the start of the job. This will help you cover
your upfront costs as you start the projects. It’s very
common to have a deposit with the signing of your contract.
It decreases the risk associated with nonpayment because
you’ve received a portion up front. You can also implement
periodic payments throughout the contract vs. a single
payment upon completion of the project so that cash is
flowing in consistently.

6. Revolving Credit Line. Establish a revolving line of
credit through a lender to help you with potential cash
flow crunches. Especially if the amount of savings from
prompt pay discounts are greater than the financing charge
from the lender or the lender’s financing charge is less
than what your vendors might charge for late payments. This
helps give your business a safety net so that you can
continue to operate during those times when you are offered
great specials if you buy today but may not have extra cash
available.

7. Savings Fund. Establish a savings fund to help you
operate through slow times. Most businesses have swings in
their business flow and managing cash effectively can be a
challenge. Store away extra during the good times to help
alleviate issues during the slow season. I know this sounds
easier than it is, but if you take out a percentage each
month and transfer it to a savings account then it will be
“out of sight and out of mind.”

You may find that each of these 7 tips is viable for your
business, or maybe only 1 or 2. Anything that you can do to
focus on better cash flow will provide benefits to your
business. The worst thing you can do is sit back and “hope”
that things go well. Look around! See those “CLOSED” signs
on the surrounding shop windows? They played the “hope”
game and lost. What are you going to do? Hope? No…implement
a plan for cash flow management starting now.


Pam Newman helps business owners keep money from slipping
through their fingers. Pam is a Certified Management
Accountant, Certified QuickBooks ProAdvisor, and Author of
Out of the Red and Unlocking the Secrets of QuickBooks. Pam
believes that it is important for you to understand the
financial picture of your business, so that you can make
informed decisions. For more information, please visit
http://www.rppc.net