Cash flow management is key to operating a successful business.
At its simplest, cash flow management means cash IN quickly and cash OUT slowly.
Follow these five practical steps to get your cash to serve you – rather than the other way around.
Once you’ve delivered a product or service, don’t wait to invoice. Get into the habit of sending invoices for payment immediately, or on a daily basis, depending on the nature of your work.
If you are providing a service, think about asking for a deposit upfront, or a payment part-way through.
Create incentives for early payments and penalties for late payments
Who doesn’t like paying less for products or services?
You can offer customers favourable payment terms if they pay their invoices early.
For example, discounts could be applied to any invoice paid early or on time, and interest could be added to any invoice that has gone neglected for too long.
These moves will encourage your customers to get payments to you early, thus immediately improving your cash flow picture.
Keep a close watch on your debtor’s days.
If it’s increasing, it might be time to step up your efforts at chasing payment. As receivables age, their quality goes down, so you should act sooner rather than later.
Keep your accounting books accurate and up to date
Your cash flow is only as good as your accounting and reporting. Don’t let this get out of hand. Make sure your accounting information is updated regularly. Then you can see the financial state of your business at a glance.
What’s more, a reliable accounting system will help you track and report on key business metrics. These include accounts receivables aging, operating margins and inventory turnover.
Having a good handle on these business metrics will help you manage your cash like a pro – and take advantage of new opportunities.
If you’re not confident with numbers, hire a bookkeeper or accountant.
Keep your business and your personal finances separate
Mixing your business and personal finances can leave you uncertain about business performance. So keep them separate.
That way you’ll know how much cash your company is generating. Then you’ll be in a good position to pay yourself a salary and to grow your business.
By correctly managing your cash flow, your incoming cash flow will be sufficient to meet your outgoing cash flow needs of your business and you can better position your company to grow and gain equity.
Contact firstname.lastname@example.org for help on your accounting and tax matters