Cash flow—the amount of money flowing into and out of your shop—is an easy concept to understand, yet not always well managed. Not every owner is aware of the impact skillful cash management has on net income, probably because the importance of managing revenue is far easier to recognize in some types of businesses than others.
Take home construction, for example. When a builder takes on hundreds of thousands of dollars in short-term debt in order to construct new homes, it’s obvious that he or she must generate substantial positive cash flow in a hurry if the business is to survive.
The situation is not that dramatic for most specialty fabrics shop owners, but skillful cash management is still critically important in every form of business activity, regardless of the size of the business, or the activity. Losing control of money has generated more financial headaches for business owners than temporary red figures on the bottom line. Conversely, a sensible cash management system can provide a comfortable and profitable cushion during good times and bad.
Here are eight powerful techniques that can help smooth out your cash flow and improve your net income right now.
Keep every dollar working
Just as they do in the big leagues, it’s important to put every revenue dollar to work as soon as you receive it. Here’s an easy way to do that:
If you don’t already have one, open a money market account at your bank and ask to have it linked to your business checking account. That will allow you to make telephone or online transfers between the two accounts.
Then, deposit all your daily receipts into the money market account where they will immediately start drawing interest.
Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover checks to be written.
The banks have made this cash management technique so easy to use that there is no reasonable excuse not to do so. While interest rates are anemic now, they have already begun a gradual climb, and you’ll be all set to benefit as the rise continues.
Don’t be in a hurry to pay
There’s a good reason that checks are slow to come in from many people who owe you money: It’s because hanging on to cash for as long as possible keeps that money available to work for the business.
It’s important to set up a system that allows you to pay your bills just before they come due. It’s an easy thing to do, and it moves you up another rung on the ladder of professional cash management.
Naturally, you don’t want to jeopardize your credit standing by paying bills late. Pay your bills just before they are due—not before, not after. It’s especially important to avoid late payment on credit card bills because of the oppressive surcharges that most banks have put into place to penalize the careless among us.
Collect your money
If you do any of your own billing, you should always stay on top of your accounts receivable. You’ve earned that money; you have a right to it, and you need it.
Dunning a late-paying debtor may not be your favorite pastime, but setting up an accounts receivable file and following through on late payments is as important to your financial success as the quality of your products. If your customers learn that you are cavalier about money owed to you, you can be certain they will stretch your patience (and your cash flow) to the limit.
Maintain a cash cushion
Try to keep enough cash in interest-bearing accounts to cover normal operating expenses for three to six months. While that’s not always an easy thing to do, it can provide invaluable peace of mind and self-confidence when revenue drops during a market slowdown. And keep in mind that your cash cushion is silently making money for you in those interest-bearing accounts.
Know your banker
Handling money is a banker’s job, and most are very good at it. While many small business owners would prefer to keep financial matters “close to the vest,” it’s a smart idea to develop a personal relationship with the manager of your local bank branch. Make an appointment, discuss your financial picture honestly, and you’ll likely get some good ideas and a favorable ear should you ever need a little financial help.
Use your computer
Whether you use a specialized software package or Quicken® or Microsoft® Money on a desktop PC, trust every aspect of your business affairs, including business and personal investments, to your computer. The financial reports and analyses that modern software can produce at the touch of a button can be vitally important management tools for improving cash flow and bottom-line profits.
The most popular software packages designed for small business are infinitely easier to use than they once were, as recently as a few years ago. More important, they will teach you in dramatic fashion how much you can benefit from a sensible cash management system.
“The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investment,” says accountant Jay Blumenthal, Abington, Pa. “It usually makes sense to lease if you will be able to use the cash in your business activities or in your investments to earn a better return than the cost of leasing.”
Anytime you have a capital expenditure, it may pay to consider leasing instead of buying. Talk to your tax advisor about this the next time you’re considering any capital purchase.
Consider firing your bank
Chances are you’ve been a victim of merger mania at least once. That’s when you wake up one day to find out the bank you’ve grown comfortable with is no longer around: It has merged with a strange new bank that promptly laid claim to your business. Will this new bank bring you better and less expensive services? Not likely. Recent history shows that some of the huge megabanks resulting from merger mania are raising inefficiency and customer alienation to undreamed of heights.
And now, with new laws blurring the line between banks and other financial institutions such as insurance companies and stock brokerages, financial behemoths may grow even larger.
Solving this frustrating problem is relatively painless. Just search out the smallest Federal Deposit Insurance Corporation (FDIC) member bank in your area and give it a try. You’ll receive more personal attention from a small neighborhood bank than you will ever get from a financial goliath, with exactly the same insurance protection you receive from the largest banks.
Taken individually, these cash management techniques may seem obvious or even inconsequential. But when you blend them together in a consistent manner, they will form a significant and permanent contributor to your net income and your economic well-being.
Quick tips for small business owners
Nearly a third of small businesses fail because of a cash crisis. Here are some strategies to help your business beat the odds:
- Secure credit before you need it and know how much you’ll need. Talk with experienced business owners in your industry for a reality check.
- Find your ideal automated accounting and cash management solution: Popular options include Freshbooks, Xero, QuickBooks Online, Float and Pulse.
- Maximize cash inflows. Require 50 percent deposits or advance payments for large or custom orders and for seasonal business to sustain you through the lean times.
- Shrink cash outflows. Reduce costs by repairing instead of replacing capital equipment, buying used equipment in good condition, delaying technology upgrades and bartering for supplies and services.
William J. Lynott writes extensively on business-related topics.