Cash flow is often said to be the lifeblood of every business, from giant corporations like Microsoft down to the smallest new start-up. Often the primary reason for business failure can be traced back to poor cash management. Unfortunately, by the time the business owner has identified their mistake it is usually too late for recovery. This article will help you think more carefully about the way you manage your cash so that you can avoid this happening to your business.
The most important part of cash flow management is ensuring that your customers pay you as fast as possible. Make sure that they fax or e-mail their order to you so that you can dispatch it without delay. If possible include your invoice with the goods, stating the due date of payment and the penalty for being late.
Try to ensure that all cheques you receive are deposited as soon as they arrive. It is often possible for businesses to arrange with their bank to reduce the time it takes for the money to become available from when it is paid in. It is useful to be aware of the cut-off time for cheque deposits – for example, paying in a cheque after 12 noon at some banks will add an extra day to clear the funds.
If you offer credit to your customers, it is sensible to have guidelines in place before accepting them. You should always carry out the standard credit check procedure on an applicant through one of the main credit agencies. If you are dealing with offering credit to suppliers it is also sensible to ask for five business references.
You should offer a small discount to those who pay within ten days to encourage prompt payment. Late payment should be followed up by sending a reminder letter on the day after it should have been received. After 30 days of non-payment, you should start legal proceedings or hand over the account to a debt collection agency.
Although this may seem hypocritical, you should never pay your bills a day sooner than you have to (unless you benefit from a discount). Many people believe that you should pay straight away but this is actually poor cash management. Remember to carry out bank reconciliation because you should not assume that banks never make mistakes (they do, often!). If you are having difficulty with managing cash to pay the bills, I have found that OnlineOffice has an excellent cash flow tool that displays your finances in graphical form – this helps me to get a clear picture of what is going on from just one glance.
A good way of controlling cash flow is through continuity sales on a subscription basis. Obviously not every product can be sold in this manner, but a subscription model of payment will guarantee regular payments for the length of the contract and therefore help with business planning. It is important to remember that items in your inventory are not cash so therefore you should try and minimise the amount of items held in stock.
