Managing Cash Flow
Cash flow--how much money is flowing into and out of your business--is an easy concept to understand. Still, not every handmade business owner is aware of the impact cash management has on their bottom line, because the importance of managing revenue is far easier to recognize in some types of businesses than it is in others. Skillful cash management is critically important to every business, from the smallest to the largest, and losing control of money can generate far more financial headaches than temporary red figures on the bottom line.
A sensible cash management system can provide a comfortable cushion during those inevitable slow times when the phone isn't ringing and customers aren't coming to you as often as you'd like. Here are nine powerful techniques to help you improve your cash flow and net income right now:
1. Never allow any of your money to lie idle.
If you don't already have a money market account at your bank, open one and ask to have it linked to your business checking account for telephone or online transfers.
Deposit all of 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 any checks written. The banks have made this technique so easy to use that there is no longer any reasonable excuse for not using it. While even money market interest is anemic now, interest rates are likely to start climbing in the future and you'll be set to benefit when they do.
2. Don't be in a hurry to pay your bills.
There's good reason why checks are slow to come in from people who owe you money. It's because hanging onto cash as long as possible keeps that money available to draw interest. That's why it's important for you to set up a system to pay your bills just before they come due. This is easy to do and moves you up another rung on the ladder of professional cash management.
On the other hand, don't jeopardize your credit standing by paying bills late. Pay your bills just before they're due--not long before, and not after. It's especially important to avoid late payments on credit card bills because of the oppressive penalties most have in place.
3. Be aggressive collecting accounts receivable.
If you do any of your own billing, never allow those receivables to go untended. You've earned that money, you have a right to it, and you need it.
Dunning late-paying customers 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 the products you offer. If your customers learn you are cavalier about money owed to you, you can be certain they will stretch your patience (and your cash flow) to the limit.
6. Develop a personal relationship with your banker.
Handling money is a banker's job and most are very good at it. Even if your business is relatively small, it's a good idea to develop a personal relationship with the manager of your local bank branch. Discuss your financial picture honestly and you'll likely get some good ideas and a favorable ear should you ever need a little financial advice.
||4. Diversify to keep cash flowing.
This is an important strategy when business is off and revenue is down. During slack times, any income is better than no income. Consider offering a variety of products in a range of price points during slow periods, and sale prices that do not satisfy your usual parameters of profitability. This approach makes sense by providing work to help smooth out the inevitable and costly ups and downs of cash inflow.
5. Maintain a cash cushion.
Try to keep enough cash in interest-bearing accounts to cover normal operating expenses for three to six months. There is nothing like the peace of mind and self-confidence that you get when you don't have to sweat out next month's rent or next week's supply bill during a business slowdown. Also, keep in mind your cushion money is making money for you in those interest-bearing accounts.
7. Let your computer help you manage your cash flow.
Whether you use one of those heavyweight commercial software packages or a simple program on your home computer, trust every aspect of your business, including investments, to your computer. The financial reports and analyses 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 were as recently as a couple of years ago. More importantly, they will teach you in dramatic fashion how much you can benefit from a sensible cash management system.
8. Consider leasing.
Most financial advisors agree leasing products like cars or vans for personal use is usually not financially advantageous. But leasing for business purposes is a different animal entirely.
"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 of Abington, Pa. "It usually makes sense to lease if you will be able to use the cash in your business or in your investments to earn a better return than the cost of leasing." Talk to your tax advisor about this the next time you're considering any large capital purchase.
9. Spread the gospel.
To do a professional job of managing cash, you must have a steady flow of the stuff coming in. Many business owners keep themselves so busy dealing with day-to-day problems that they never get around to putting together an aggressive business-building marketing program. That's a serious mistake. Marketing is an essential ingredient in the recipe for growth--even survival--of any small business. Yet many owners shy away from all but the most obvious ways to promote their businesses. For some, their entire marketing program consists of a website or an expensive ad or two.
In another time or another place, someone may have bought the necessary equipment and supplies, placed a single ad online or in the Yellow Pages, and sat back while the phone rang off the hook and customers poured in. Perhaps, but not likely. Today, building a growing and profitable business requires an ongoing marketing program. There is no other way. Competitive prices alone won't do it. A high degree of professional skill alone won't do it. As one entrepreneur puts it, "You have to tell the world your story. If you don't do it, no one else will."
Taken individually, good cash management techniques may seem obvious or inconsequential. However, when you blend them together in a consistent manner, they will form a significant and permanent contributor to your bottom line and your economic future.
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