Although cash flow is the predator that leads to failure of most small businesses, it can bring large businesses to their knees as well! The demise of a business takes place when money flowing into a business, consistently, does not cover the expenses needed to run the business! This deadly business malady can be caused by rapid growth, over inventoried situations, high wages, high overhead expenses or unrealistic budgeting! Follow these essential guidelines and it is not likely that you will be “bitten” by this common business bug!
In Part I, we will review four of eight basic tenets for optimal cash flow, Part II, next week will cover the remaining four!
1. Keep an eye on the books!
Increased sales, healthy bank balances do not necessarily translate into favorable cash flow! The CEO should personally review financial statements along with the CFO on a monthly basis! Good financial reports disclose the funds moving in and out of the business. If your accounting software does not create these easy to read statements, readily highlighting “extremes” or “exceptions”, you should search for new software! The key is to know what to look for in each report, review them and react to the “red flags.”
2. Use frugality when paying bills!
Vendor payment terms can be regarded as interest free loans! Always take the maximum amount of time allowed to pay invoices. I.E. If the 15th of the month is the deadline, do not pay on the 1st! Set up an electronic bill payment solution, if available, which allows for setting the exact date a bill is paid and money withdrawn from your account! If not yet set up; talk with your bank or switch banks if not available!
3. Incentives become advantages!
Never pay a bill early unless you get a discount for early payment! Incentives are available for early payment, typically within a week or two of the billing date. Even a small discount, I.E. 2% can be thought of as a 24% annual return if the money were to be invested! By the way, if a vendor doesn’t offer discounts, don’t be shy, ask for it. After all, they are interested in improving their cash flow as well!
4. Set up and organize your receivables schedule
Tardy paying customers are a nemesis and cause cash flow problems, yet they are inherent in every business! Don’t let invoices pile up and lag without scrutiny. Use software to track invoice tracking. A good program can classify receivables by age – e.g. less than 30 days, 30 to 60 days, 60 to 90 days etc. Review your receivables schedule on a regular basis; take timely (key word) action on overdue invoices. Have a collections system set up with form letters to be dispatched on a regular basis and collection action beyond letters for serious delinquencies in place!
Randy Snyder is a specialty retail veteran with over 30 years with major national retailers and 10 years as a retail consultant. He has experience in franchising along with all aspects of specialty retail acquired with four major retail chains!
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