Problem – Poor cash flow can kill a business. Learn more about it and how to manage it, and you increase your chances of survival.
Eighty per cent of all small businesses fail in the first year. Think about that statistic for a minute. If one hundred people start a small business on New Year’s Day, only twenty of them will be celebrating on the next New Year’s Eve. The other eighty will be trying to figure out what happened.
There are numerous lists that catalogue reasons why new businesses fail – poor planning, lack of understanding of the industry, bad management, and so on. But on every list you encounter, at or near the top you will find cash flow. There’s a reason why Cash is King. Let’s examine that appointment to such lofty status.
Definition – Cash flow is the difference between cash on hand at the beginning of the period being measured and cash on hand at the end of that same period. How much money is in your bank account today vs. how much was there at the beginning of the accounting period? Positive cash flow means you took in more than you spent. Negative cash flow means you spent more than you took in.
Importance – Why do you care about cash flow? Many business owners assume that the net income is all they need to worry about. A profit on the bottom line means you’re successful. Your creditors are happy when they see a profit. But there are other things to consider.
Cash flow does not equate to profit. You may have a very good P&L, but if your sales are uncollected, you could have cash flow issues. Even a very profitable business can fail if their customers pay late or not at all.
Cash is King because he rules the world. Without cash, you can’t pay your employees. You can’t buy new supplies. You can’t meet your debt and tax obligations. A business that runs out of cash will have to cease operations. It doesn’t matter how great your bottom line looks if the operating account is overdrawn with no sign of relief.
There are businesses in which cash flow varies greatly. There may be times when it is extremely positive, and others when it is low. Consider a store tied to summer tourist trade: High cash flow in the summer; little or no cash flow in the winter. The only way to survive that cycle is to carefully manage those differences, like the squirrel storing nuts. He understands cash flow. His cash is acorns, and he knows that he will fail without them.
So how do you gather more acorns so that your business doesn’t fail? There are some things you can do.
Increase sales – That’s obvious. The more you sell, the more money people will owe you. But selling and collecting payment are not always the same thing. Also, it might not be that easy to sell more in a hurry. It could take some careful planning, increased inventory, greater commitment from the sales team. Yes, it can help, but if the frost is already on the pumpkin, you might not have time to “cash in” on those increased sales.
Sell an asset – What do you have on hand that someone will give you cash for? If it’s your great-grandmother’s china, then that might be something you could stand to part with for the cash, but in your business? If you have a valuable asset, chances are you need it to keep producing your widgets.
Cut Expenses – A great idea, but easier said than done. If your business is new, you’re probably already running pretty lean. And it’s not the tiny things that are going to save you. Printing on both sides of the paper may be economical as well as environmentally kinder, but those portions of pennies are probably not what you need. It may mean scaling back your staff, smaller office space, negotiating with your major supplier for a better deal. Look at your P&L and see which bucket is the biggest. For many companies, it’s payroll. How can you reorganize tasks so that you eliminate a person or two?
Raise your prices – Another obvious choice, but also another one that’s easier said than done. If you’re in a highly competitive industry, this might be the worst thing you can do. If you’re in a service industry, you might be able to add value to your existing customers and command a higher fee. But again, it’s not selling that increases your cash flow, it’s collecting those sales.
Pay more slowly – This could work if you have a strong P&L and valuable assets. You may have suppliers who understand that you’ve had trouble collecting and will extend your terms. If you can defer some payments while you get your cash flow under control, it could be the thing that saves you. Just make sure you aren’t putting off payment for so long that your debt becomes insurmountable. Have a payment plan to get that under control just as soon as you collect your outstanding sales.
Invest more – Do you have personal money you can “loan” the business? In addition to any start-up capital you invested, your own cash could be the stop-gap you need until you get cash flow under control.
Borrow – Some creditors will offer loans or lines of credit to help with cash flow if your business is otherwise healthy. The absolute best time to borrow money is when you don’t need it. So maybe a pro-active line of credit can get you through the lean times. But like with any other influx of cash, be prepared to pay it back. Have a plan.
Collect Receivables – This could be the most obvious solution. If your business has a great bottom line but no cash, the difference is probably going to be on the balance sheet under Accounts Receivable. Get that money off the books and into the bank! Take control of your cash flow by taking control of your customer payments.
How do you make that happen?
Relationships – Establish great relationships with your customers. This means you each understand the others’ expectations. It also means you’re comfortable having a collection conversation with them. How quickly you will be paid should be high on your list of priorities. Be sure your customer knows when to pay and how.
Make it Easy – Back in the snail mail days, it was widely known that if you provide a return envelope with your invoice, your customer paid it more quickly. It makes sense to eliminate as many procrastination points as possible. Bring that into the modern world with “pay now” links, auto pay, or any other technology that makes it easier for your customer to pay you.
Offer a discount for early payment – two ten/net 30? Would you give up two per cent of your total invoice to get it paid almost three weeks sooner? If your cash flow is more of a trickle, this a s small price to pay. Remember, you can’t spend money on the books. Get it into the bank.
Communicate – Don’t stare at you’re A/R aging and grumble. Tell your client you’re looking for payment. Many business owners procrastinate on this because it can be an uncomfortable conversation. Not if you’ve worked on that first tip – relationship. If you have a good relationship with your client, they won’t be mad at you for asking for your payment. Maybe they simply forgot. Or maybe they have a situation that’s keeping them from payment. You need to know that. And you won’t find out unless you communicate.
Automate – Today’s world offers many ways to take the manual process and make it easy. Software can send out your invoices, generate reminders, ask for payment when it’s due, and send a polite thank you.
At InvoiceSherpa, we work on all of those items. Your invoice delivery system is easily automated. You control the settings for issuing reminders. Past Due notices are customized to your style and approach. But all of it is done automatically. Collection time is cut in half with the InvoiceSherpa system. It’s proven. Turn your Cash “trickle” into a Cash “flood” with InvoiceSherpa leading the way.
Posted on September 5, 2017
While AR can indeed cause stress and waste vital time, it can also be a powerful tool when managed correctly. With the right insights, you can turn it into an advantage for your business. That’s why we’re going to walk you through how to calculate accounts receivable in this guide.
In this guide, we’ll walk you through how to outsource accounts receivable to a reliable, trusted provider so you can save time and stress less, while improving cash flow within your business.