What do all successful companies, regardless of size, have in common? They manage your cash efficiently. Best ways your small business should manage cash flow and debt management.
Cash flow can quickly become a real problem for small businesses. A study found that 61% of small businesses worldwide have cash flow problems, and almost a third (32%) do not make payrolls, supplier payments, or loans.
It is like small businesses place greater importance on individual payments. Late compensation can significantly impact everything that follows, potentially forcing a company into debt.
Typical minor business cash flow problems include understating required start-up capital, overstating profit margins, slow accounts receivable, and expanding operations too quickly. That is just the tip of the iceberg – plenty of other ways to recover from a cash crisis.
That said, all is not gloomy. You can use many cash flow strategies to ensure you always have money to cover your expenses. Check out our list of 5 customs to achieve small business money flow.
Table of Contents
1. Simplify incoming payments
The first step to good cash flow management is choosing the correct payment methods that make paying easier for your business. There are several ways your business can get paid, and they all have different rates.
When choosing the correct payment method, small businesses must weigh their options and decide what works best. For example, do you operate online and only want to accept credit card payments or digital wallet services like PayPal? Do you have a physical store that requires an on-site cash and card payment point of sale?
Using multiple payment methods and understanding the terms of each can complicate but also increase your cash flow. With a variety of options available, you may be able to attract more customers who can pay using their preferred method.
Things small businesses should consider when choosing payment options include:
- Business model (online shop vs. brick and mortar).
- Fees associated with the payment method.
- How extensive will it take before you collect the money?
- The typical transaction amount they expect.
- Accounting system/software.
2. Choose an appropriate time frame
If you look closely at a company’s cash flow, you’ll see that it’s all about payment planning. If you mess up your payment schedule, your business can be profitable and in trouble.
Many bills are monthly, while others may be quarterly, semi-annually, or annually (some taxes, for example). These payments should be planned and supported by your cash flow plan. While incoming payments are usually spread out over the month, many companies offer payment plans that apply large purchases over several months to attract more customers.
While it can be easy for small businesses to focus on the “here and now” and only look at their monthly cash flow, taking a longer-term view offers real benefits. For example, calculating sales and expenses on an annual basis will help you understand the value of specific customers and the location of important cost centers.
3. Do your research
Although cash is king and ideally obtained in advance, credit supply has become the norm in many industries and a barrier to entry for new businesses. Providing goods or services and expecting to be paid for them is an inherent risk. It is up to individual companies to decide their risk tolerance and the credit they extend to their customers.
To get a better picture of the risks involved, research and meet potential customers before lending. While it can be challenging to turn down a deal, it’s not worth it for the customer if the uncertainty of seeing the money is too great.
The first step is to crisscross your credit history. It can be for companies (B2B) or individuals (B2C). With B2B payments, it can be worth digging a little deeper and checking the credit history of key people within the organization or reviewing their operations. Please note:
High-value, low-volume orders: For high-value, low-volume orders, late payment is enough to seriously disrupt your cash flow and create potential problems for your business.
Long Chains of Transactions: Customers who are part of a long chain of transactions pose a higher risk to customer accounts. The customer’s cash flow depends on all companies before them making payments on time. A late payment early in the chain can create a ripple effect that delays your payment.
4. Accelerate accounts receivable
You can reduce cash flow management to speed up accounts receivable and slow down accounts payable (see #5). You want to optimize your cash flow by getting paid and delaying payments as long as possible. Other companies try to do the same, which makes us all hypocrites since we treat all our suppliers as we expect our customers not to treat us.
How to speed up the buying process for customers? By being proactive, it is. Provide timely and accurate invoicing to ensure your customers are notified of pending payments as soon as possible. Accounts Payable, in turn, must authorize payment.
Timely billing ensures that they are immediately notified of the bill and can start paying it directly. Today, many electronic invoicing and payment systems can inform your customer of the amount due, when payment is due, and even process the price—still, one of the best AP automation systems.
If you are offering a loan, you should put clear terms in writing so everyone can understand them. The terms and conditions under which you offer credit are essential to effectively managing customer accounts. They define your tools in terms of late payment penalties or monitoring late payments.
You can also take advantage of prepayment incentives to get money faster. Sometimes the disadvantages of discounts and lower profit margins outweigh the security of faster payment.
5. Delay accounts payable
Late penalties limit the maximum time you can achieve. But you can use strategies to maximize your time on accounts payable. These include:
- Choose providers with flexible payment plans.
- Create a hierarchy of invoices with business-critical invoices at the top.
- Determine the minimum payments required to avoid high-interest rates on the debt.
- Establish an accurate invoice verification process for all supplier accounts.
- Demand better payment terms from long-term suppliers.
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