We have said this before, and at the risk of sounding irksome we’ll say it again because it is the gospel truth: companies fail, not because of bad sales, but on account of bad cash flows. And this is especially a problem for companies that are growing rapidly. Bad cash flow is one of the 3 insidious accounting issues that small and medium businesses are inadvertently faced with.
When businesses grow, expenses grow, too. You may need to hire more people, so that’s extra salaries. You may need to expand your turf, improve infrastructure, replace old equipment, stock up on new inventory, update your technology and so forth, and those are extra costs. It’s ironic that despite the success of the business you don’t have the cash to manage daily operations! Is something finished today but not paid for on time? So you suddenly find yourself in the middle of you a cash flow crunch, that impacts decisions you have to take, necessitates certain cuts and measures (like hasty discounts to roll in quick cash), or makes you lose out on certain good businesses opportunities or investments because you don’t have the money to make it work right now. Without a proper cash flow, your business is basically buggered. And that is why it is so important to have a solid reserve of money, and to manage cash well.
There could be a few common reasons why your cash flow crunched.
Is your money getting stuck because:
- People are paying you late?
- People aren’t paying you?
- Their cash flow is stuck?
- You forget to collect it on time?
- You haven’t properly handled the money you had?
Since your business deals with batches of money in circulation, the question is, on due dates are the monies owed to you coming back? While in some cases your clients may be facing cash flow problems themselves, in other cases there are things you should do to grease the wheels right from the beginning, and put certain processes in place to encourage remunerators to pay you back on time.
So how do you keep a smooth rotation of cash?
By collecting your Accounts Receivables (AR) on time. Adopt the right methods to get you money coming back quickly to your business.
Here are some quick pointers:
- Sensible payment terms – If it ought to be net 30, don’t save the relationship with net 60, nor break the contact with net 15. Be sure to also include the payment terms in your contracts.
- Clear invoice – Are you making invoicing mistakes that directly affect your business? The invoice needs to clearly state the amount and due date.
- E-mail invoices – E-mailed invoices are proof of delivery, act as reminders, can have a ‘pay now’ button, and are more efficient.
- The AR aging report – Review your AR regularly. Know the payment status.
- Reminders & follow-ups – Never wait till after it’s due. Employ
- gentle reminders just before due dates
- follow-ups right past due dates
- dunning letters way past due dates
- what’s a euphemistic word for ‘threats and penalties’?
- Early payment discounts – Disguise the bait in the discount and offer it to clients who pay early.
- Check is in the Mail – Get a Post Office box or offer multiple payment options, especially digital modes.
- Past-due payment plan – If they have trouble themselves, suggest a payment plan to help them out. But ensure further work is done COD or withheld.
- Outsource – Pass the buck to an agency whose primary job is to handle your accounting and, thereby, the collections.
- Drop the dead weight – Chew this cud: keep the client and lose the cash vs. lose the client and use the dunning energy to find a credible one.
- Review and adjust your spending – Take educated risks, tracking valuable KPIs over the year that can provide valuable financial intelligence and help you quantify your ROI to make better decisions.
Manage cash flow!! – Your reserves are your safety net. Don’t spend money till you have it. Which means don’t spend based on expected invoices, but by cash actually there in your bank account. When you manage your cash flow well, it allows your business to scale growth without compromising quality, performance, volume or service.
Additionally, take you could take effort to follow some good accounting hacks that can help you smoothen out business operations.