Six Tips for Managing Cash Flow
Every small business owner I’ve ever worked with – including myself – has struggled with managing cash flow.
Sometimes your business checking account is flush with thousands of dollars. Sometimes, especially after paying quarterly taxes, payroll, credit cards, or other end-of-month bills, your account is running on fumes.
Here are six tips for keeping your cash flowing and your business moving forward when the accounts are looking lean.
1) Invoice for 50 percent at the beginning of each project – I follow this practice whenever possible after a client approves my estimate, which states that I will send them an invoice for my retainer, payable immediately, before starting the project. No client has ever complained. Remember to issue your follow-up invoices for the balance of the estimate promptly.
2) Offer discounts for early payments – Some of my creative colleagues have offered their clients discounts of up to three percent on their invoices if paid within 10 days of the invoice date. This reduces the float in time between invoicing and when you receive the check.
3) Ask your client to pay you electronically – One client of mine in Tokyo likes to pay via Paypal in U.S. dollars at the end of each month. I send her an invoice through their system. Within an hour or two, she pays me. Though Paypal charges a small fee (about 3.25%), it’s worth it for the convenience of being paid so quickly. Other clients pay me through Electronic Funds Transfer, which has to be set up through their Accounts Payable department (and my bank).
4) Try factoring – Factoring is a merchant service in which a business owner sells accounts receivable at a discount to a third-party funding source that pays invoices immediately. The fee for factoring is typically two to six percent, but you get paid right away. Think about how much that could be worth to your business vs. the fee you’d pay on a line of credit when waiting for large invoices.
5) Open a business line of credit – To help provide a cash cushion in especially tight months, speak to your banker about the benefits of a business line of credit. You’re only charged interest on what you borrow, and once you build up your bank account, you can pay the bank back.
6) Track your receivables – If any of your invoices are 30 days or older, call the client’s Accounts Payable department and ask where your invoice is in their payment queue. In most cases, the invoice never got to them and they’ll usually pay it promptly.