Five Tips for Improving Small Business Cash Flow
Are your small business cash flows tight? Do you sometimes find yourself juggling bills or negotiating for early payments from customers? You may want to consider trying these five, sure-fire tips for improving your cash flow:
Tip #1: Invoice Often and Quickly
Perhaps the easiest thing you can do is quickly invoice customers or clients. Invoicing more quickly means not only that you get paid more quickly. But invoicing as soon as you've shipped a product or provided a service often means you collect more money.
For services, for example, you'll typically find it easier to bill more for a service if the customer or client still remembers all the details of your service. Wait a few weeks, however, and the customer may have forgotten about the extra work you did or the special service you provided.
Tip #2: Ask for Deposits
Especially if you're working with new customers or clients, you may want to consider getting an upfront deposit before beginning work, shipping product, or investing time.
Deposits deliver several cash flow benefits. They get you part of your payment up front obviously. Upfront deposits also tend to reduce your bad debts--if only because they force you to discuss pricing and costs in the beginning. Finally, deposits tend to scare away bad clients and customers--the kind of people who only hurt your cash flow in the long run anyway.
Tip #3: Fire Bad Customers, Vendors and Employees
The subject of bad customers and clients brings up another cash flow improvement tip.
Almost surely, you've got unprofitable customers, vendors and employees. By firing these people, you will improve your cash flow in the long run. You may even improve your cash flow in the short run.
Think about this.
Tip #4: Reconcile Your Bank Accounts and Implement Other Internal Controls
You want to know something weird? Small businesses are regularly victims of employee, customer and vendor theft. You can't really stop people from trying to steal from you. But you can do things that let you spot the slime balls earlier and make their theft more difficult to accomplish.
One of the most important things you should do in this regard is reconcile your bank account. With accounting software programs and online banking, the process shouldn't take more than about thirty minutes a month in many cases.
If you resell inventory, you may also want to reconcile regularly your accounting records for your most valuable inventory items with actual physical counts.
Tip #5: Make Sure Products & Services Are Really Profitable
One final point is worth making. As a general rule, small businesses deliver high rates of return on the owner capital invested in the business. Probably about 40% on average. That means, when you stop to think about, that a small business that's working right should be generating plenty of cash flow. Enough to pay vendors, employees, banks and--yes--you.
Now of course even a healthy business sees its cash flows ebb and flow. But if you're chronically challenged by your business cash flows, you maybe don't have a cash flow problem. Rather, your cash flow issues may be symptomatic of inadequate profit on the products and services you sell.
In this case, what you may need to do re-engineer your business model so it's more profitable. Once your business does become more profitable, you should find your cash flow troubles disappearing.
About the author:
CPA Stephen L. Nelson is the author of Maximizing Employee Retention Credits.