Just as watching your blood pressure is important to your personal health, monitoring cash flow is vital to the well being of your business.
Minor “hiccups” may be expected, but they can also be an early warning of bigger, potentially chronic problems ahead, especially if other indicators such as sales seem positive.
Though critically important, monitoring and predicting cash flow is actually a matter of consistently following some simple, common sense financial management practices.
The object is to make certain that more cash enters your business than exits your bank account. First, you need to translate sales into real money as quickly as possible. Once you”™ve collected the cash, your business needs to guard it. Surprises, such as slow or nonpaying customers and unexpected expenses, are your worst cash flow enemies.
One way to shift cash your way is to ask for all or a portion of payment up front. Asking for at least a deposit in advance is a great way to jumpstart your cash flow. If you don”™t ask you will not get. If you establish the policy fairly and properly, it shouldn”™t alienate good customers.
Accepting credit card payments also can help, so you may want to sign up for a merchant account that allows you to do this. Or, if you already have one, encourage customers to use this option more often. You do pay a fee for this. But credit cards are a great way to speed cash into your account and the cost is generally small. You will be able to negotiate this fee with your bank.
You may need to manage “receivables” more closely. This is the money that customers owe to you for products or services you”™ve delivered. Create a detailed “aging” schedule of what you are owed, by whom and for how long. Place phone calls to overdue accounts, focusing first on the largest amounts due. Offering a discount can bring some quick cash in the door, but play this card only after you”™ve called the customer to ask for full payment.
Finally, don”™t overlook the power of an operating budget. Note specific due dates for payables as well as receivables and regularly use it to get a “snapshot” of your cash flow status. With that information, you”™ll be better able to make short- and long-term plans, spot potential problems and avoid potentially crippling cash crises.
Ross Weale is an assistant director with SCORE. Reach him at rweale@optonline.net. SCORE is a nonprofit whose volunteers provide free counseling and training to small-business owners. Call 1-800-634-0245 or visit www.score.org.
