One of the biggest challenges for small businesses is managing cash flow. If it seems like there is never enough cash to meet all of the obligations, take steps to speed up cash flow. Managing internal processes can have a surprisingly effective return on accounts receivable. Here are five tips to get cash faster or slow down the outflow.
1. Stay on top of cash account balances
For businesses that collect money in more than one account, be sure to move money on a regular basis when balances get high. One example is a PayPal account. If money is coming in faster than it is being spent, transfer the money to a main operating account so the money is not just sitting there. Regularly scheduled checks here help maintain proper and predictable balances.
Another good reason to monitor cash is making sure the balance on your financials is accurate. We often see clients with “stale” transactions, meaning old checks, double entered debit card transactions or deposits that didn’t occur. On a couple occasions, these errors amounted to a $20-30K swing in cash. Talk about found money!
2. Invoice faster or more frequently
An effective way to smooth cash flow is to make sure outflows are in sync with inflows. If payroll is made weekly, but invoices only go out monthly, proper planning is required to make sure the 4 payrolls don’t exceed the cash available. When possible, invoice more frequently or stagger invoice due dates to smooth out cash balances.
Since the above example is really a timing difference, a big gain can be made in getting the actual cash in the door quicker. Take a look at how long it takes to invoice for work after it’s been completed. Some businesses wait a couple weeks to issue invoices for completed work. If it’s longer than a few days, study the invoicing process and shorten the time it takes to send them out. Often there are opportunities for efficiency in communicating job completion, approval processes for time sheets, or job costing. Attention to these processes is a worthwhile investment, because it can have a direct impact on AR, which results in improved cash flow.
3. Collect faster
Get slow paying clients to have a credit card on file or an ACH authorization. This controls the payment schedule, and keeps them from delaying payments. One landscaper client used to invoice its monthly maintenance customers at the end of the month and would often wait 30 days for payment. That’s almost a 60-day cash cycle. By charging customers credit cards on the 15th of the month they were able to dramatically improve their cash flow.
Put a process in place the day the invoice becomes late. Be assertive about following up when the bill is 45, 60, and 90 days past due. Turn it over to collections quickly; the older the bill is, the less likely it is to get paid. Conversely, improvements in communication can keep aging to a minimum.
4. Pay off debt
As cash flow gets healthier, make a proactive plan to pay off any business loans or credit cards. Interest paid on these debts is toxic to cash flow. For that reason, it is always a worthwhile effort to renegotiate debt with high interest rates when possible. A few minutes of effort here can save significant future cash.
For some reason, we see a lot of reluctance in paying down a line of credit with available cash. Usually the explanation has something to do with “we’ll probably need it soon anyway” or “we’re waiting until we get payment from customer XYZ.” Lines of credit are vehicles to cover short term cash needs but work the opposite way too. If there’s 50K of excess cash in the bank account this week, pay it down and save that weeks’ worth of interest. Then, if there’s a shortfall next week, draw it back. What often happens is the shortfall only requires a fraction of the 50K meaning there’s a permanent reduction in the LOC balance; those little savings can really add up!
5. Reduce spending
There is a series of questions that can be asked of past expenses that may allow for reduced spending without necessarily compromising business needs:
- How good of an investment was the expense for the business?
- What expenses were a colossal mistake?
- Are there expenses that are taken for granted that can be cut?
- Where could contracts be re-negotiated to save some cash?
- Are there areas that could be tightened?
Remember, any expenses that are eliminated are immediate cash in the bank. For every dollar of sales generated, it costs X to provide.
Managing cash flow is an ongoing challenge. Businesses that don’t have these scheduled processes in place don’t have the influence over their cash flow to affect change when needed. Businesses that do however, are taking control of their destiny.