Reining in an Unruly Cash Flow
By Steve Wedig
Few things are as important to the ongoing health of a small business as a steady cash flow. While cash flow is related to a business’s overall profit, it is not the same thing. Your business may be profitable while still experiencing times when cash flow is so unsteady that you are unable to issue pay checks or pay your bills. Ongoing cash flow problems can even lead to the eventual failure of a business. So what can you do to avoid these kinds of challenging situations? Here are a few common-sense pointers.
- Keep your books in good order. Before you can solve any cash flow problems, you need to know exactly what is coming in and what is going out. By keeping good records of what was invoiced and paid as well as what expenses you had, you can be sure to have an accurate picture.
- Get your invoices out promptly. It goes without saying that your customers will not pay you until they receive an invoice. Therefore, it is important to send out invoices as soon as it is possible after the customer receives your product or service. Some businesses issue invoices monthly, but in some cases it may be beneficial to send them out more frequently. For example, if you know a customer pays bills only once per month, you would want to make sure your invoice arrives before the day bills are paid.
- Assess your credit risks. Not everyone pays bills in a prompt manner, and in fact some customers may not pay at all. As a small business owner, you need to protect yourself. If customers are not paying up front, you may need to establish whether an individual is a good credit risk before extending any product or service without any payment. Businesses can always require their customers to pay in part or in full before goods or services are delivered, especially in the case of a questionable credit risk.
- Consider adjusting credit terms. If you are constantly finding yourself in a situation where more cash is flowing out than flowing in, you may need to revisit your credit terms, both of your payables and receivables. If most of your payables are due upon receipt, but you allow 30 days to receive payment on your invoices, then you may have ongoing cash flow trouble. Sync them up to keep a healthy cash flow.
- Think about alternative solutions. Sometimes we get boxed into doing things the way they have always been done. It is okay to think about novel solutions to your cash flow issues. For example, you may consider offering your clients a small discount (perhaps 2% to 5%) if they pay in a certain length of time. Or some businesses allow clients to pay by credit card, enabling a quicker payment with a small percentage being paid to the credit card company. While both of these solutions cost the business a small amount of the total, they nevertheless help the business to get paid in a more timely manner.
Federated Bank also offers lending products that can keep cash flow from becoming unbalanced. Our lines of credit have flexible terms which can be tailored for your unique situation. Come in and talk with any of our loan officers to see how we can help you to keep your business or farming operation functioning with a healthy positive cash flow.
