Cash flow is said to be the lifeblood of any business. If you need help in managing your cash flow, here is a comprehensive guide in handling and managing your cash more effectively. There’s something you can never afford to forget when you are running a business out of your home — cash is king!
Whether it is a multi-billion dollar empire, such as Bill Gates, or the tiny mom-and-pop convenience store on the street corner, cash is the lifeblood of the business.
In today’s uncertain economy with ever rising interest rates, many small businesses with limited financial training are having problems staying alive, let alone prospering. In fact, 63% of new businesses don’t survive six years — and most work-at-home people fail within 6 months!
The primary reason is bad cash management. Too many self-employed people neglect their cash flow until it is too late to recover. Suddenly, presto! it’s back to your office job! We don’t want that to happen.So the big question is: How will you manage your cash flow effectively? If you are not sure, then you are on shaky ground.
Les Masonson, author of Cash, Cash, Cash: The Three Principles of Business Survival and Success, says cash flow is all about, “getting the money from customers sooner, paying bills at the last possible moment, concentrating money to a single bank account, managing accounts payable, accounts receivable and inventory more effectively, and squeezing every penny out of your daily business.”
Let’s break down Masonson’s tips one at a time.
In your business, you should collect money as fast as you can. To do so, try these four things:
- Try to speed up customer orders by having them fax their orders to you
- Send out your invoices the same day goods are shipped, not a week or two later.
- Indicate on your invoice when payment is due, and specify the penalty interest for late payment.
Deposit cheques fast!
This seems only obvious, but it’s extremely important. In fact, here are Masonson’s six sure-fire suggestions for getting the fastest availability on deposited cheques.
Always deposit cheques the same day they are received. Don’t hold cheques until the next day because you lose one day’s float. Key point: you can lose three days of float by not depositing Friday’s cheques until Monday.
Obtain availability of 0 to 2 days on deposited cheques. Don’t let your bank give you the customer availability of 1 to 5 days. Be persistent. Ask the bank for its “availability schedule” and scan it to be sure you’re receiving fast availability of two days or less.
Each bank has its own availability schedule. This is used to assign cheque availability to consumers, business (commercial accounts), and large corporate accounts. Availability is the number of days until you can use the money deposited by cheque as cash. For example, a Rs.1,000 cheque deposited today and assigned a one-day availability can be withdrawn as cash tomorrow.
Ask you bank about its deadline for receiving availability on deposited cheques. Some banks may require a deposit of a cheque by 2 p.m., even though the bank is open to 5 p.m. Make sure you make this deadline, otherwise you lose one day’s float.
Before using a bank’s ATM for cheque deposits, find out the bank’s availability deadline. Some banks have a 12 noon cut-off time which means that any cheques deposited later are considered to be deposited the next day! In that case, you lose an entire day’s float, even though you did your bit to get the cheques cashed.
Have a super tight accounts receivable policy
Many people think it is no big deal to neglect accounts receivable until bills are collectible. This is bad cash flow policy. Here are seven excellent tips for handling accounts receivable:Check the financial health of a new customer before offering them credit. One way of doing this is by using a rating service, such as Dun & Bradstreet (1-800-234-3867).
Ask a new customer for five business references and don’t neglect to call them.
Don’t offer too generous discounts, such as 3% for payment in 10 days. A better rate is 1.5% cash discount. It costs you less.
Charge a “late fee” of 2% per month to customers who pay late and charge back customers who take discounts after the discount periods.
Follow up on late payers with phone calls and letters. These may seem a bit extreme, but the first letter should go out the very day the amount is one day late! After 30 days late, start this sequence:
- send out a letter from your attorney
- turn over the account to a collection agency
- use a collection attorney
Don’t send out new merchandise if bills remain unpaid. Remember that bad debts hurt your bottom line! Be vigilant and try to get at least periodic payments from slow payers.
Instruct your bank to automatically deposit “returned cheques.” Ask your bank if they offer Return Item box service. If they do, then use it to redeposit your cheque and charge back the bank return item free to your customer.
These steps are tough and unrelenting, but they may make the difference between a positive cash flow month and a sluggish month for your business. It may seem a bit hypocritical to demand swift and exacting payment, and then do what we suggest next.
But just remind yourself, all (almost) is fair in love and war and business.
Disburse Your Money Slowly
Just the opposite of collecting at the earliest possible moment, you should never pay a day sooner than you have to, unless you get a discount for doing so. A lot of people believe in staying ahead of bills and paying them as early as possible, but that’s just poor cash management.
You want to keep your money in your hands as long as you can. Here are five suggestions to slow down your disbursements:
Pay your invoices on the last day they’re due, not before.
Try to mail your payment on Thursday or Friday to pick up a few extra days mail float over the weekend.
Use business credit cards for travel, lodging, meals, and small expenses for yourself and your employees. With credit cards you typically don’t have to make payment until 25 days after receiving the statement. Use this float by investing the money. In total, you can typically keep your money invested for 45 days from date of purchase.
Don’t issue advances to employees. Have them use their personal credit cards or business cards, if you provide them
Consider setting up a remote disbursement checking account in another state to extend the cheque clearing float by at least a day. This practice is used very successfully by 17% of large companies. The downside of this practice is that some vendors may complain about their delayed availability on their bank deposit. But this can be overcome by mailing them their cheques one day earlier.
many small businesses neglect to reconcile their monthly bank statements or assume that the bank never makes a mistake. Banks do make mistakes, and you must stay on top of your disbursement to control your cash flow.
By: Nabeel Niaz