As an entrepreneur, you know steady cash flow is the lifeblood of your business. Statistically, poor cash flow is the number one killer of businesses during their first year; and it remains a constant concern for over half of all businesses past the five year mark. So how can you keep your cash flowing at a healthy rate? Here are a few tips to help you create a fool proof strategy for your cash flow.
Get the Record Straight
Keeping your books organized can help you keep track of exactly how much money is moving through your accounts. Most companies lose sight of the importance of keeping good books during the first year due to the tremendous startup workload. Investing in a reliable bookkeeping platform should be a number one priority during business set up. Once the books are off, they often get worse as time progresses. Even minute discrepancies such as incorrect invoice numbers can throw off your books. These seemingly minute issues can lead to non-payment or only partial payment of invoices which can seriously disrupt your cash flow.
Plan Ahead for Potential Bad Debts
Bad debt is monies that cannot be collected or recovered from a customer. Establishing a rock solid credit program from the get-go is essential. Make sure your system is set up to regularly send statements to credit holding customers. For instance, choose an easy to remember date with automatic reminders through your bookkeeping system. Sending out credit letters on the 15, 30, or 1 of each month can increase the probability of total payment.
Control When Money Comes in and Goes Out
In some cases, you may need to renegotiate your credit payment terms with your customers in order to get cash on hand for your bill payments. This catastrophic collision can occur when customer payments are due at a time during the month after your business bill payments. To ensure your success during renegotiation you can sweeten the deal by offering incentives. For example, you can offer discounts for early payment, a percentage off for payment in full, or discounted services or products. Often customers will be more open to term renegotiation if there is something in it for them.
Constantly Reevaluate Your Cash Flow Forecast
Accurate cash flow forecasting is essential to any new business. It’s important when forecasting to account for each and every possible or foreseeable debt, especially upon startup. It is also extremely important to understand times during the year when your business may see a cash deficit. This lull period happens for all types of businesses, but it can be an exceptionally difficult time for those that are seasonal. Be sure to set aside income each month to help you make it through seasonal cash deficit periods.
At the end of each year, compare your actual cash flow to your forecast. This comparison report can tell you during which periods you may have miscalculated both deficit and profit periods. After a few years, you should have a relatively accurate yearly forecast mapped out.
Learn From Loss
A simple lack of profit could be the root of your cash flow problems. Keeping up on reports can help you determine which products or services aren’t profitable, which are profitable, and when they accumulate the most profit. If certain aspects of the business simply aren’t making a profit, it may be time revaluate you business model and cut the fat.
New businesses most often have to make adjustments during the first few years to solidify their cash flow. It isn’t uncommon to have to make some major changes to get the system right. Established businesses must not become complacent with forecasting, bookkeeping, and report analyzation. This continued cash flow analysis can help both established and new businesses more accurately navigate the ever changing and sometimes fickle market.
Image via Sally Smith