One of the earliest lessons I learned in business was that balance sheets, and income statements are fiction and that cash flow is reality. It would be best if you learned quickly that metrics like profits, sales, or net worth don’t impact the day-to-day operations of a small business as actively as cash flow. But some small business owners don’t have a solid grasp of their cash flow, which is problematic – especially as their businesses start to hit a stride.
If you’re worried that you might be among this group business owners, then check out these ten ways to manage your cash flow as your small business grows.
10 Ways to Manage Your Cash Flow
1. Stay organized.
Know where every invoice, bank statement, and receipt can be found electronically. Invest in digital accounting and filing software to access accounts receivable and other categories quickly and easily. Utilize bookkeeping services to keep your business records reconciled so that you know how much money is on the line each month.
2. Focus on your monthly net.
Determine exactly how much revenue you need to break even each month and align your cash flow goals with that in mind. Then prioritize cash flow over profits until your business is consistently in the black.
3. Structure your expense payments strategically.
If your vendor has a net 45 payment policy, pay the bill on the 44th. At the same time, negotiate with your customer to pay you electronically. Also, try to encourage early payments from clients by offering a slight discount if they spend quickly (say, Net 15, never for Net 30, they are supposed to pay you in 30 days).
4. Focus on your clients’ accounts payables departments.
The fourth way to manage your cash flow is to focus on your clients’ account payables. Cultivating AP contacts will make it easier to inquire about unpaid bills. Learn your clients’ payment processing protocols upfront to sidestep potential roadblocks when submitting invoices. It’s best to have a name to call when you are trying to track down your money.
5. Be your own collection agent.
If you are being paid on time, then you will never have a cash flow problem. Unfortunately, that doesn’t happen all the time, so managing your cash flow means managing your collections. Put someone on your team in charge of collections. You often have to assert yourself if you want to be paid on time. So when an invoice is late, start calling on day 31 and follow up with an email, and keep it up until you get a status update, or the check comes in.
6. Know how to negotiate contracts.
If you land a long-term project, feel free to structure a monthly payment or periodic payments within the contract so that you get as much of the money upfront as possible. Progression payments are a must! You want fees once specific benchmarks are met – instead of waiting until the end of the project to receive your money.
7. Be on the lookout for “scope creep.”
“Scope creep” will eat your profits if you are not careful. If the client repeatedly asks, “Can you do this as well?” disagree until you recalculate your costs, and present them with an addendum to the original contract. There’s nothing wrong with charging additional fees for additional work.
8. Sell off old inventory or equipment.
If you have inventory that has been sitting around for a long time, discount it substantially and unload it. The same goes for idle or inefficient equipment (that’s what Craig’s list and eBay are for). Getting a small amount of money for it is better than nothing.
9. Lower your loan payments.
See if you can renegotiate your monthly bank loan payments to a more favorable interest rate. Even an extra hundred dollars in your pocket each month can go a long way. Ask your bank if they will eliminate or lower any maintenance or service fees on overdraft or lines of credit accounts.
10. When possible, barter.
If you have a graphic design, website person, or partner that you do business with, if you send them referrals or need your services, suggest a bartering arrangement. You get to keep your cash in your pocket, and it could be a win-win for both parties.
Ask yourself ‘why’ three times before taking on any new expenses. Review all existing expenditures and find unique ways to reduce costs and free up funds to bolster your cash flow. Your goal is to avoid unexpected fiscal hiccups. It’s not glamorous, but it’s a smart approach if you want to maintain your business and increase your profitability over the long term.
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