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With tightening credit markets, entrepreneurs are being advised to watch their dollars carefully.Â Many companies that fail don’t do so because of a lack of customers. They fail because of a lack of cash.Â If clients owe you money, and you don’t have enough funding to pay this month’s lease, you have a cash flow problem.
Here are three tips to help you manage your company’s cash flow:
Collect accounts receivables quickly. “Stay on top of your billing. Get your invoices out on time, and don’t let any slip through the cracks,” says Debbi Smith, CPA and owner of Smith Accounting and Associates in Marietta, Georgia.Â “A lot of owners have to handle their administration as well as their regular business. It’s easy to forget to follow up with a late-paying customer, but remember, a follow-up call is just as important as a new client call.”
Pam Perry, owner of Ministry Marketing Solutions, a public relations company in Detroit, says the best option, if possible, is to charge upfront. “Since I’m in a service business, it’s important that I bill out in advance,” says Perry.
Even though Perry receives payments early, she says that she occasionally has to deal with clients who don’t pay.Â “In those cases, I sometimes hire a virtual assistant (VA) to make collection calls on my behalf. It works really well because the VA is an impartial third party who keeps the conversation professional,” Perry says.
Read your cash flow statements. When you do receive payments, track them in your financial documents. You probably know that the income statement and balance sheet are important, but don’t forget to regularly review your cash flow statement, too. It lists your cash income and outgo, marked at specific time intervals.Â If you need to create your own, there are several free templates online.
Even if business is good, the cash flow statement could alert you to potential problems down the road, especially if you don’t get paid for your work in a timely manner.Â Not having enough cash on hand could affect your ability to get a loan or access resources to help your company grow.
Credit advisers look at cash flow statements to determine a company’s financial health, says Orlinda Jackson, a business and financial credit adviser in Atlanta. “If a company needs to increase their cash flow, my advice to them is to reduce debt, collect receivables quicker than the due date, increase sales, and manage payables more closely,” she says.
Keep a cash reserve. Just as people need to have money saved for a rainy day, businesses need to keep a cash reserve.Â “The best time to build a reserve is when you don’t need it. If you’ve had a good month and gotten paid over and above your budget, put some of that money in your business savings,” Smith says. “You’re never certain about what’s going to happen in the future. If times get hard, you might have to use the reserve to