When you’re running a small business it’s a useful tip to think of cash as the food it needs to survive. If the money runs out, the business won’t live very long unless it can find some more!
Steve Parks writes in his excellent book Start Your Business Week by Week that a business’s cash food also needs to come regularly enough to keep the business healthy. It’s no good having months of starvation and then a glut, because by the time the supply of food (cash) arrives, the business will either be too weak to survive or will have already died.
Here are five ways you can keep your cash flow healthy and avoid starving your business.
5 Ways to Keep Your Cash Flow Healthy
1. Invoice Promptly – You may think that it’s obvious that you should send an invoice quickly after finishing the work, but our own internal research found that 16% of sampled invoices were sent more than 60 days after the work was completed! I’ve experienced this firsthand: my husband and I had some work done to our chimney this summer, and we’ve never received a bill for it, despite reminding the contractor several times — so that means we can’t pay him.
Our research also found that if you delay by just a week in sending your invoice, you’ll wait twice as long for payment . So don’t wait like my contractor did! Make sure you invoice your customers as soon as you have finished the work. Set aside a specific amount of time each week to do your bookkeeping (we suggest an hour a week), and make sure that you spend part of that time on your invoicing. You’ve done the work, you’re entitled to the money; make sure you ask your customer for it with a prompt invoice.
2. Make Payment Easy – It’s a lot easier to get paid when you make it easy for your customers. Instead of taking checks which take time for your customers to write, cost them money to mail, and then take you extra time to deposit, why not consider letting your customers pay you online by using Internet banking or a service such as PayPal, Stripe or Dwolla.
Make sure you put your payment details on your invoices, like the routing number and account number of your business bank account. If the invoicing software that you use allows it, try adding a PayPal “Pay Now” button on the invoice e-mail. This makes sure that your customer has that information handy and can pay you quickly and easily.
3. Review Your Customer Payment Model – When do your customers pay you? If it’s after you’ve finished the work or sent the goods, you’re taking all the financial risk of that sale. The customer could end up refusing to pay, and you’ve already spent the time or the costs of making that sale.
Could you hedge against this risk by asking customers to pay some, or all, of your fees up front? Also, if you’re supplying ongoing services, could you bill monthly instead of annually? This not only makes the customer’s cash flow easier because they don’t have to find money for one big bill all at once, but it also smooths your cash flow out and removes those peaks and troughs.
4. Know When Your Bills and Taxes Are Due – Cash comes in but it also goes out; that’s why it’s called cash flow. To make sure you’re on top it, plan ahead so you know when you’re going to have to pay money out from your business.
When do you have to pay your suppliers? Keep unpaid bills separate from paid ones, so that you don’t risk forgetting to pay altogether and upsetting your supplier. Stick to your suppliers’ payment terms if you possibly can. After all, you never know when you might need that supplier to go the extra mile for you, so try to keep a good relationship with them.
Remember as well that you will also have to pay taxes to Uncle Sam. Keep track of what is due and when, and pay on time, to avoid any late filing penalties and interest which will only eat into your cash balance all the more.
5. Forecast for Safety – When do you expect the money to come into your business, and go back out again? How do you know when you might run out of cash? What if you want to expand your business, perhaps by making a new product to sell, or going into a different country? How do you know you’ll have enough cash to do that and keep your existing business running smoothly?
Make use of a forecasting tool such as Float to plan your future income and spending, to make sure that your business won’t run out of the cash food it needs to survive.
This post was originally published on the Small Business Bonfire. The Small Business Bonfire is a social, educational and collaborative community for entrepreneurs. Join their online business community and read their small business blog to get immediate access to small business help, tools, advice and resources.
About the Author:
Emily Coltman is a qualified accountant and Chief Accountant at FreeAgent, an online accounting system specifically designed to meet the needs of freelancers and small businesses. You can try it for free at www.freeagent.com.