I was ranting elsewhere about cash flow and thought you guys might enjoy it so, here you go. Honestly, cash flow is very rantable. It’s a massive issue for small businesses and one of the main reasons so many of them fail. You may be wondering what the difference is between having profitability issues and have cash flow issues. After all, isn’t that profit just another word for leftover cash? The short and sweet answer is that profit is about earning more than you spend, cash flow is about actually bringing in that money before you have to send it back out to pay your expenses. You’ll see that distinction gain some clarity in a moment in two common variations of the cash flow crunch.
Many small businesses are cash based. They get paid today for a hamburger today. That’s not to say that they don’t take credit cards or PayPal or whatever random, ethereal space money the kids are talking about these days. Electronic payments are actually a form of cash and the credit card companies take the risk for you, since you know that you will be paid once someone’s card is accepted. The alternative to a cash business is one that actually offers credit to customers in the form of agreements or invoices that are paid at some future date (hopefully).
If you run a cash business then your cash flow issues will mostly take the form of timing. Let’s say that you make most of your money at the end of each month but pay your bills at the beginning and the middle. You need to be sure that you have money in the bank when it comes time to pay those bills. This is mostly just forethought and planning. If you are out of money when the bills come in, because you didn’t get enough to cover them all, then you are back to having profitability problems, not cash flow problems.
On the other hand, let’s say you invoice customers or let them buy on account and pay their balance off in the future (not the flying cars, everything-is-chrome future, maybe 30 or 60 days down the road.) Now you have the added complication of timing the inflow and outflow of cash from your receivable accounts. Preventing cash flow issues when you have accounts receivable may require thinking about a few new steps in your process:
Do you evaluate who is or is not credit worthy before you extend that privilege?
How much cushion do you need to have in the bank in case your customers pay late?
How promptly do you send invoices and how often/soon do you follow up to remind someone of a late payment?
We’ll leave #1 up to your judgement, just remember that you might generate more sales by offering delayed payments but you have to balance it against the risk that some people will pay you late and some won’t pay you at all. This is less dramatic than stuffing merchandise in your pants and running past the cash register of a cash business but it has the same effect on your bank account.
Thinking about #2, you need to imagine what would happen if your customers DID pay you late; I mean all of them. You could quickly go from a seller with late paying customers to being a late paying customer yourself. That can be very damaging on your relationship with your suppliers (or your landlord) and you may not have many back-up options. A month worth of cushion could change the world because you are basically counting on your income to pay next month’s expenses, not this month’s.
Finally, send invoices now. Right now. Right away, as soon as you provide the service or ship the product out the door. Provide a friendly follow up email just before the invoice is due and don’t be afraid to send reminders to anyone who is late paying their bill. So many businesses lose a ton of money because they just don’t collect the receivable income they have already earned. Another fun tip, build a small late fee into your charges (just don’t make it a line item called “automatic late fee”) and, instead of charging a fee for late payment offer a discount for early payment. You get paid quickly and maintain a positive vibe with your customers; Win/win.
What can you do right now to improve the cash flow of your business? Drop some ideas in the comments!