3 Tips for Managing Cash Flow in a Tough Economy
During tough economic times, cash flow is one of the first things that small-business owners must come to grips with. After all, any company is likely to struggle when there isn’t enough money coming in. Cracking down on your cash management is a good way to ensure that your business sticks out the recession. Here are three tips for doing precisely that.
1. Stay on top of projections. Many small-business owners don’t enjoy preparing cash-flow projections, but in tough economic times, they can be key to survival. Try to be as precise as possible in your projections — and do them as often as monthly or weekly (as opposed to occasionally, which you may be able to get away with under other circumstances). Start by talking with various personnel, particularly whoever oversees sales, collections, and accounts receivable. Ask for a list of monies due during the projected time period. Next, meet with the person (or people) in charge of accounts payable and payroll, to get an idea of what kind of money you need to pay out in the same period. The difference between the money coming in and going out is your projected cash flow.
2. Collect payments faster. One of keys to managing cash flow is collecting any money that’s owed to you as soon as you can. The problem is that people tend to take longer to pay their bills during tough economic times. The National Federation of Independent Business recently released a report that shows that small-business owners are waiting an average of 48 days to get paid. This can lead to difficulty when you’re relying on those payments to keep your business afloat.
Encourage your customers to pay up sooner by:
- creating a system that gives cash discounts to those customers who pay their invoices early;
- publicizing a policy to convert slow-paying customers to COD (collect on delivery) accounts;
- not extending credit to customers until they’ve passed an extensive credit check; and
- following up immediately with a phone call when invoices are late.
You'll find more ideas on this topic in this post.
3. Pay bills on time, but not early. On the flip side, you can opt to hold onto your cash reserves as long as you can without becoming a bad credit risk to your suppliers. During financially difficult times, you shouldn’t necessarily be worrying about being the best debtor — just make sure you're still one who pays on time. For instance, if you’re in the habit of paying bills as soon as you receive them, consider waiting until they’re due. If you’re used to getting a break for early payments, you’ll may want to re-evaluate which tactic works best for your company: having cash on hand or receiving a discount.