The cash flow position of a small business can determine the success or failure of the business. On paper according to the profit and loss report many businesses look great; the bank account and angry vendors often reveal a different side to the story. I can't tell you how often we hear clients ask us "how come I don't have any money in the bank if my sales and profits are so high?" Typically the answer to this question is one of two things; overstated sales or the money is sitting in accounts receivable. Try these four simple ways to increase your business cash flow.
Get Paid Up Front
A pretty elementary way that you can increase your cash flow is to get paid before any work is done. Establishing your billing procedures with new clients right from the beginning will save you headaches down the road. Consider taking credit cards and maybe even make it a policy that you only accept credit cards. I think that many businesses shy away from accepting credit cards because of the merchant processing fees. My advice would be to build the fee into your rate. That is figure out what you would charge a client, calculate the approximate merchant fee, add the two figures together and bingo there is your rate. Communicating your billing procedures with clients right after they accept your proposal won't increase cash flow by itself. You will have to enforce the billing procedures. When a client doesn't follow the billing procedures that you clearly established you might want to consider firing your client.
Collect on Accounts Receivable
Many small businesses can't wrap their head around why their bank balance is always so low if their sales are so high. A quick balance sheet reveals the answer; the money is sitting in accounts receivable. All too often a small business will make a sale and send an invoice but fail to follow up on the payment. Establishing accounts receivable policies with your bookkeeper will really help increase your cash flow. When bills are overdue it is important to send an invoice or statement reminder. Emailing statements and invoices from QuickBooks is a good way to speed up the payment process.
Cut Expenses or Increase Sales
When cash flow is a concern for a business the choice is simple; cut expenses or increase sales. Why is it that when cash flow or profits start to suffer a business owner's first instinct is to cut expenses? I get pretty frustrated by this mentality for a few reasons. First, if there are expenses to be cut then you are wasting money anyway. You should always be running your business at an optimal expense level. Second, cutting expenses may actually hurt your business more than it helps in the long run. If you cut crucial expenses like your marketing and advertising budget then you may later find out that you are committing business suicide. Lastly, why not stop be lazy, stop making excuses and just go sell. You may argue that you need to cut labor because you don't have enough work. I say go find some new clients for your business. Never stop selling....NEVER STOP SELLING!
Stop Paying Unnecessary Fees
It kills me to see individuals or businesses paying unnecessary fees. Fees such as overdraft fees, bank fees and interest on depreciating assets (like car loans) are big no no's in my book. Pay attention to those fees and interest payments. Make sure to track them in your accounting system and review regularly how much you are spending in these categories. It may surprise you how those little fees can add up over time. It is important to develop good spending habits that incorporate an absolute unwillingness to pay unnecessary fees.
Cash flow is the lifeblood of a business; you can't do much without a good healthy stream of cash coming into the business. You can keep cash flow at optimal levels by establishing clear billing procedures, regularly monitoring your accounts receivable, making sure your business is operating at optimal financial levels and making it a policy to avoid unnecessary fees.