6 do's and don'ts to maintaining a positive cash flow for small businesses
Maximizing profits...that’s the ultimate goal of your business, right? But “profit” without the cash to back it up, isn’t much more than a concept. And have you ever tried to purchase something with a concept? Probably didn’t go so well for you, did it? As the saying goes, “cash is king.” You need it to pay the bills when they’re due, and to pay your staff. But long sales chains or slow-paying clients could put you in a cash flow crisis if you’re not prepared. Here are a few things you can do (and not do) to better manage your cash flow.
DO lower cash outflows
While your accounts receivable department works on your cash inflow, take steps to reduce the outflow. Repair your equipment before replacing it, and if you have to replace it, go used if possible. Place payroll on a semimonthly cycle instead of biweekly. And keep an eye on personal expenses.
DO pay attention to unpaid invoices
You can’t pay your bills with unpaid invoices. Collect receivables ASAP. Offer discounts to customers who pay quickly. Charge a reasonable penalty fee on payments late beyond 30 days. Have customers preauthorize checks. Whatever you do, don’t lose track of billing. Let me repeat that for those in the back: Whatever you do, don’t lose track of billing!
DON’T be overly optimistic about future cash flow
Prepare a forecast of your expected monthly cash flow for the coming year and be honest! Does your business have a slow period? Are there any big-ticket items that you anticipate coming up? Don’t base your projections on best-case scenarios. Go by industry benchmarks and your most recent cash flow analysis or statement.
DON’T lose the trust of your vendors
Like you, your vendors will want to be paid ASAP. Find the right balance and timing for paying your bills on time while taking advantage of the terms allotted. You want to keep a good credit rating and cordial relations with critical vendors.
REALLY DON’T wait too long to get a business line of credit
Almost all companies at one point or another find themselves in need of a sudden infusion of cash. Don’t wait to open a business loan or business line of credit (LOC) until you need it. Do it now so you can take the time to find the best interest rate and have access the funds when you need them.
REALLY DON’T let your cash reserves get too low
There will be shortfalls. Especially if your business is just starting out. You should have a cash reserve equal to at least two months of your company’s operating expenses (four is ideal). This will keep you running if you’re hit by an unexpected dry spell, a client fails to pay up, a major piece of equipment dies, or any other number of bumps in the road that are bound to happen.
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