Contrary to popular belief for most small business owners, the idea that the best tactic for business growth is to find a solution to better cash flow, is actually flawed thinking.
While steady cash flow can often ease pressure on a business, it can often end up in a cash flow crisis even as the business grows. Instead, it is better to eliminate the surprise element of cash flow issues if you plan for growth and cash flow together.
Experts have made the following recommendations to better manage the cash flow.
Strategies to Collect Receivables
There should be a clear strategy to speed up the receipt and the processing of receivables which should be done promptly. Billing must be done early so that the collection is made early.
This is a standard safeguard against late payments. You should make the invoices as detailed and clear as possible. If you wait until the end of the month to send your invoice you will very likely hurt your cash flow.
Make it a practice to generate invoices as soon as you deliver the goods and services.
If you are handling and processing some big orders, your strategy should be to go for a progress focused stage of invoicing, this could be based on milestones. An initial deposit should be requested before begin to process the order. Perhaps somewhere in the vicinity of 30% to 50% of the total fee.
If there is an overdue account, you may likely lose track and neglect your obligation to follow-up. No account should be left overdue. You are less likely to recover an account the longer you remain out of contact with a customer. You may want to consider a reward scheme to motivate your customers to pay early with discounts for making those payments.
Finally, consider the various ways your customers can pay you so that making payments become easy for them. In fact, it is a really good idea to add a payment link with the invoice. Anything you can do to make life just that bit easier for them… and for you!
Short and Long Term Financing
You need both short and long-term financing options.
The two should not be mixed up and there should be a clear understanding of what you do with long-term or short-term financing.
When you need to make emergency purchases, short-term financing including a line of credit can be used. You can pay your vendors using the business credit cards many banks will issue.
Long-term financing can be used to make large asset purchases including real estate and expensive equipment. You should not use your working capital to make such purchases to avoid landing your business in cash-flow trouble.
Generate Quick Cash
Your working capital should not be used for anything that it is not meant to be used for.
Nevertheless, there may be times when you need cash. Your business strategy here should be not to tinker with the working capital but to generate quick cash when needed.
You may be having obsolete inventory or equipment you no longer use. Consider disposing of it for quick cash. As it is obsolete, idle and non-working. equipment ties up your capital and occupies space that can be used more productively.
Long-held equipment may likely some value to the business of equal or less than its current market value. If that is the case, your sale may result in a taxable gain. If the sale is gainful, it can be reported in your tax return. You will incur a tax loss if you sell it below the book value. This can be used to offset the other profits of the company.
One final and important thing to consider should cash flow be of concern to your business is working with a professional business accountant who can help you evaluate risk and prepare for any unprecedented occurrences that might be around the corner.
Ainsworth Accounting Solutions are here to help you with any of your business accounting needs and we’d be happy to speak with you. Simply contact us today to take the next step!
