Business Finance

Managing Cash Flow for Your Small Business

Jun 30, 2016 • 5 min read
Managing Cash Flow
Table of Contents

      The efficient functioning of your business can be defined by how well you are managing cash flow for your small business. As your business operates, you incur expenses to keep it running. These expenses can include salaries and wages, cost of raw materials, machinery, and other inputs along with the maintenance and other incidentals you incur. Together they make up the outflow of cash. The payments you receive for the products and services you sell and the interest you earn from any investments you might have made for your company make up the inflow.

      As long as the inflow and outflow every month are balanced, your company continues to perform well and you can expect good profits and success in the long run. While you do make payments on time, you’ll also expect that your customers will pay up when you make sales. But when payments lag, you could face a cash crunch and upset the balance. To ensure that you maintain this balance, you need to adopt certain practices to make sure that your clients make payments regularly. Here’s what you need to do.

      Be Clear on the Payment Terms

      At the time of negotiating the prices at which you’ll be delivering the goods, discuss the payment terms in detail. Make sure the customer is well aware of the date when the payments become due and the the number of days for which you’re offering credit. Clarifying the issues in advance ensures that there is no ambiguity later. You’ll also ensure that it’s easy to collect payments and find that managing your cash flow becomes a lot easier.

      Work Out Payment Details

      Discuss how your clients will make payments beforehand. Will they pay in cash or by credit card? Prepare for the possibility that the payments are late. Make the applicable procedures clear in case they need to extend the credit. For instance, they must provide a credit extension request in writing and sign it properly. By setting down these rules with the very first invoice, customers are aware of the terms on which they’re working with you.

      Send Out Invoices

      Create and send out invoices with every shipment or as soon as the services are complete within 24 hours. Following this rule can raise the possibility of you receiving payments quickly by 20% to 30%. This is because the transaction is still fresh and the clients remember the amounts they owe. Timely invoices ensure timely payments and make managing cash flow easier.

      Discounts or Penalties? Which Work Better?

      Many entrepreneurs levy a small penalty for the payments that come in after due date. Often times, the customers may choose to pay the penalty if it means extending the credit. However, if you can instead offer discounts for early payment, clients see it as a way of saving money. Thus, they are more likely to pay up sooner and avail of the discount. Work out the percentage of the discount and the time frame within which it is applicable according to the industry in which you work. Like, for instance, you could choose a sliding scale of discounts. Customers can avail of a 10% discount if they pay on delivery, a 7% discount if they make payment within a week, and 5% if they pay within 10 days. In addition, you can work out more favorable incentives and discounts for larger clients that make up a bigger percentage of your business.  

      Follow Up on Invoices

      An important step in managing your cash flow it to call up your customers and confirm that they have received the invoice as soon as you send it. Ask if they need clarifications or have queries. Once again mention when the payment is due. By talking about the issue, you indicate that you intend to hold them to their commitments. A few days before the dues are payable, once again, call your clients and ask if they have approved the invoice. Remind them of the due date. If you don’t receive payment by the due date, you must call right away and ask for an explanation. Waiting for too long indicates that you’re okay with late payments and extending credit without talking about it first.

      Use Software to Track Payments

      When you’re dealing with a large number of customers with various dues, amounts, and payment dates, it could become difficult for you to keep track of each payment. A good strategy that helps in managing your cash flow is to use software. Many software allow you to maintain the proper accounts of your receivables. Their online versions are mobile and tablet friendly so you can check back on payments on the go. Another advantage of using software is that the updated accounts give you a clear understanding of the financial status of your business.

      Offer Discounts and Promotions with Caution

      Many enterprises offer free add-on products and other small discounts in an attempt to get better business. Offering gifts on birthdays and anniversaries is a great promotional tool that attracts more customers to your business. However, you need to factor in these expenses carefully and assess how they affect your cash flow. If you feel that they eat into the profits you’re earning, you might want to rethink your promotional strategies.

      Other Factors to Keep in Mind

      Entrepreneurs often neglect to factor in the interest they lose when customers don’t pay up on time. Extending credit to get more business seems like a good way to get clients, but when you calculate the interest you lose in the long run, you might find that it cuts back on the profits you’re expecting. If you find that managing our cash flow is becoming difficult, go over the procedure you’ve adopted to create invoices, send them, and receive payments. You might find that by making some minor adjustments, you can improve the efficiency with which you collect dues.

      Have a Plan B in Place

      No matter how well you plan your expenses and income, you might have to deal with situations where you’re running short of cash. To ensure that your business operations are not affected, set aside a small amount of cash to deal with emergencies. It should be adequate enough to keep your business going for at least 2 to 3 months. In addition, you could apply for lines of credit. You can draw only the amounts you absolutely need and you’ll need to pay interest on only the advances you use. If you face a situation where you face a serious lack of funds, consider making loans against the unpaid invoices you have by way of a process called invoice factoring.
      Using these simple methods of managing your cash flow, you should be able to keep your business operations running smoothly.

      About the author
      Lendio Editorial Team

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