5 Cash Flow Tips To Grow Your Biz
By Andrew Patricio
April 17, 2014
Small Business & Entrepreneurship
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By Stefanie Neyland, Small Business Content Developer at BizLaunch.com
In the world of entrepreneurship, cash is king. One of the most common reasons that small businesses fail is that they run of money—they may expect big earnings in the next few months, but if they don’t have enough cash coming into the business to cover operating expenses during that time, they may find that they never get the opportunity to realize those profits. That’s why it’s so important for entrepreneurs to manage their cash flow effectively. Follow these five steps to improve your cash flow management today.
1. Set Up a System
First things first: ensure you have a payment and invoicing system in place. Have your system in writing in your initial agreement and on each invoice, and then decide what your payment terms will be and stick to them. Also, pick one or two days per month when you invoice all your customers to avoid the confusion that comes with billing people as services are rendered.
2. Develop a Cash Flow Forecast
Cash flow forecasting is important for any business. Create a cash flow forecast by following these steps:
List Your Assumptions
Forecasts are driven by assumptions and these assumptions can be based on past performance and projected demand. Make educated assumptions about:
Prepare Your Sales Forecast
Use past year's figures to identify trends and look at internal and external factors that could impact your sales. Based on these assumptions and past figures you can now develop a sales forecast. Keep in mind that you should be tracking your receivables to determine your average collection days. For example, do you collect 90 percent of your sales within terms, or is it closer to 60 percent? This can significantly impact your cash flow.
Estimate Your Operating Expenses
The key to this step is identifying all the expenses (direct and indirect) and anticipating the timing of each payment. Common expenses include:
Put the Information Together
Once you've done your cash inflow and outflow projections, you can net the two to find your estimated closing bank balance for each month. Run this statement by your accountant to make sure that your projections are realistic and don't forget to review and update regularly.
3. Offer Discount for Early Payers
One way to motivate people to paying invoices early is to give them incentive through a discount. It might just be five percent, but if your invoices are large, your customers will appreciate the savings. The discount does, however, need to be enough to instill change. If five percent isn’t getting you any early birds, go up. It’s better to lose a little to get paid on time than to be paid the full amount late. Similarly, the flip side of the motivation equation is negative reinforcement. For anyone who pays beyond your terms, charge a small fee, and increase it as that time period grows. If you have a client or two who consistently pay really late, this may be a wake up call to pay better attention to their accounts payables.
4. Monitor Your Receivables
Outstanding receivables are a business owner's biggest enemy. Your bills don't stop just because the customer hasn't paid you. By monitoring your receivables you can make timely decisions that will help you to:
Improve cash flow - By actively following up to collect outstanding receivables, you will be more likely to collect on time, and improve your cash flow as a result.
Improve cash management - If you can turn around receivables faster then your payables, you will have positive working capital that can be used to grow your business.
Deter unnecessary debt - The longer receivables are outstanding, the less likely you are to be paid. By monitoring these accounts you can avoid writing off bad debts.
5. Use good accounting software
Ensure that you enter information into your accounting software regularly, monitor your bank balance daily, make sure your invoices are issued at the right time, and develop reports to detail your cash flow. If you don't like the software program you're using, switch to a user-friendly program or enlist the help of a qualified expert who can advise you.
By taking an active approach in the management of your cash flow, you can manage your business more efficiently and grow your business to its full potential. If today’s advice has inspired you to get your cash flow in order, check out the ‘Free Tools’ section of the BizLaunch website to download a free cash flow forecast.
In the world of entrepreneurship, cash is king. One of the most common reasons that small businesses fail is that they run of money—they may expect big earnings in the next few months, but if they don’t have enough cash coming into the business to cover operating expenses during that time, they may find that they never get the opportunity to realize those profits. That’s why it’s so important for entrepreneurs to manage their cash flow effectively. Follow these five steps to improve your cash flow management today.
1. Set Up a System
First things first: ensure you have a payment and invoicing system in place. Have your system in writing in your initial agreement and on each invoice, and then decide what your payment terms will be and stick to them. Also, pick one or two days per month when you invoice all your customers to avoid the confusion that comes with billing people as services are rendered.
2. Develop a Cash Flow Forecast
Cash flow forecasting is important for any business. Create a cash flow forecast by following these steps:
List Your Assumptions
Forecasts are driven by assumptions and these assumptions can be based on past performance and projected demand. Make educated assumptions about:
- Price increases (the timing and amount from you and your suppliers)
- Sales growth estimates
- Seasonality
- Operating expenses
Prepare Your Sales Forecast
Use past year's figures to identify trends and look at internal and external factors that could impact your sales. Based on these assumptions and past figures you can now develop a sales forecast. Keep in mind that you should be tracking your receivables to determine your average collection days. For example, do you collect 90 percent of your sales within terms, or is it closer to 60 percent? This can significantly impact your cash flow.
Estimate Your Operating Expenses
The key to this step is identifying all the expenses (direct and indirect) and anticipating the timing of each payment. Common expenses include:
- Wages and salaries
- New asset purchases
- Loan repayments
- Business operating expenses
Put the Information Together
Once you've done your cash inflow and outflow projections, you can net the two to find your estimated closing bank balance for each month. Run this statement by your accountant to make sure that your projections are realistic and don't forget to review and update regularly.
3. Offer Discount for Early Payers
One way to motivate people to paying invoices early is to give them incentive through a discount. It might just be five percent, but if your invoices are large, your customers will appreciate the savings. The discount does, however, need to be enough to instill change. If five percent isn’t getting you any early birds, go up. It’s better to lose a little to get paid on time than to be paid the full amount late. Similarly, the flip side of the motivation equation is negative reinforcement. For anyone who pays beyond your terms, charge a small fee, and increase it as that time period grows. If you have a client or two who consistently pay really late, this may be a wake up call to pay better attention to their accounts payables.
4. Monitor Your Receivables
Outstanding receivables are a business owner's biggest enemy. Your bills don't stop just because the customer hasn't paid you. By monitoring your receivables you can make timely decisions that will help you to:
Improve cash flow - By actively following up to collect outstanding receivables, you will be more likely to collect on time, and improve your cash flow as a result.
Improve cash management - If you can turn around receivables faster then your payables, you will have positive working capital that can be used to grow your business.
Deter unnecessary debt - The longer receivables are outstanding, the less likely you are to be paid. By monitoring these accounts you can avoid writing off bad debts.
5. Use good accounting software
Ensure that you enter information into your accounting software regularly, monitor your bank balance daily, make sure your invoices are issued at the right time, and develop reports to detail your cash flow. If you don't like the software program you're using, switch to a user-friendly program or enlist the help of a qualified expert who can advise you.
By taking an active approach in the management of your cash flow, you can manage your business more efficiently and grow your business to its full potential. If today’s advice has inspired you to get your cash flow in order, check out the ‘Free Tools’ section of the BizLaunch website to download a free cash flow forecast.