The amount of revenue your business turns over in a month is obviously a significant contributor to your overall business performance and profitability. BUT, the amount of revenue your business generates is only one indicator of the financial position of your business. The hard truth is great businesses can lose their footing because of cash flow blunders – regardless of how much revenue is coming in the door.
Preparing cash flow projections for next year, next quarter and, if you’re on shaky ground, next week can alert you to trouble well before it strikes. Understand that cash flow plans are not glimpses into the future. They’re educated guesses that balance a number of factors, including your customers’ payment histories, your own thoroughness at identifying upcoming expenditures, and your vendors’ patience. Watch out for assuming without justification that receivables will continue coming in at the same rate they have recently, and that payables can be extended as far as they have in the past.
Small business owners often extend credit to customers by allowing them to delay payment for services or products. Money owed by customers for goods or services already provided is called accounts receivable. Improper management of collecting this money results in problems with cash flow as business owners attempt to balance receivables against payments to suppliers and bills.
Increasing the accounts receivable turnover helps businesses operate more efficiently with smoother cash flow. This can be done quickly by changing the credit terms your business offers. Reduce the time frame a customer is given to pay a bill to improve the accounts receivable turnover (provided the customer actually pays) or revise credit policies to send invoices out immediately. Diligent follow-up is another crucial practice, but somebody still has to make that call. A saving grace that can be considered Best Practice for cash flow control, but unfortunately is often overlooked, is automation of collections.
When you are managing a growing company you have to watch expenses carefully. Don’t be lulled into complacency by simply expanding sales. Any time and any place you see expenses growing faster than sales, examine costs carefully to find places to cut or control them.
Take full advantage of creditor payment terms. If a payment is due in 30 days, don’t pay it in 15 days.
Use electronic funds transfer to make payments on the last day they are due. You will remain current with suppliers while retaining use of your funds as long as possible. Communicate with
your suppliers so they know your financial situation. If you ever need to delay a payment,
you’ll need their trust and understanding.
Sooner or later, you will foresee or find yourself in a situation where you lack the cash to pay your bills. This doesn’t mean you’re a failure as a businessperson – you’re a normal entrepreneur who can’t perfectly predict the future. And there are normal, everyday business practices that can help you manage the shortfall.
The key to managing cash shortfalls is to become aware of the problem as early and as accurately as possible. Banks are wary of borrowers who have to have money today. They’d much prefer lending to you before you need it, preferably months before. When the reason you are caught short is that you failed to plan, a banker is not going to be very interested in helping you out.