Understanding Cash flow is tessential – which means you have to ensure not only that the cash keep coming in but that it flows smoothly through the system to keep your business functioning.
New business owners often make the mistake of letting cash flow manage itself – which tends to have the same effect as expecting your car to fuel itself. Once the gas runs out, things come to a grinding halt.
The first lesson of cash flow is: understanding cash flow .
The second is that your goal is to have positive cash flow at all times, meaning that the money flowing into your business is greater than the amount of cash that is flowing out.
You need to have positive cash flow to pay your bills, to invest in growth, and to cope with emergencies. Here are five strategies to use to help you keep your cash flow positive from the get-go.
Understanding cash flow 1) Encourage customers to pay their bills promptly.
One way to do this is to clearly indicate on your bills when payment is due and what the consequences of paying late will be. For instance, a bill for services would indicate a specific due date for payment to be received, followed by a line stating, “Following (the specified date) a late payment charge of 2% will be assessed.” Be sure you consult a lawyer before implementing this, as charges that are perceived as unfair may be subject to The Consumer Protection from Unfair Trading Regulations 2008 act and could result in a fine.
A more positive way to encourage customers to pay promptly is to reward them for doing it. You might offer customers who pay within 14 days rather than the stated 30 a small discount such as 2% off their bill.
Understanding cash flow 2) Pay your business’s bills at the last moment.
The wise business owner who has a good handle on understanding cash flow will pursue a policy of “do what I say, not what I do”, however, and pay your business’s bills on the day that they’re due, to keep your money in your accounts as long as possible. Financial software such as QuickBooks makes it easy to set up notification features to remind you when bills are due so you can pay at the last minute without ever worrying about late payments.
Understanding cash flow 3) Get money upfront as much as possible.
If you provide services, get in the habit of asking customers for a deposit upfront, so they pay a certain percentage of the projected total bill before work begins. If your services involve using or installing materials, such as a landscaper installing a walkway, you can also ask for the cost of materials upfront.
And if you’re in a business that involves provided services repeatedly over a period of time, such as maid or lawn services, you can pre-sell your services for a set period, such as a year. These continuity sales can be a great source of cash flow.
Understanding cash flow 4) Track customer accounts and actively pursue late payers.
Because cash flow is so critical to your business, it’s crucial that you keep a close eye on your customers and their payment habits. You can’t afford to ignore customers who habitually pay late or not at all. Once again, using financial software makes it easy to see customers’ track records, flag those that need to be followed up on, and send appropriate payment reminders.
Understanding cash flow 5) Review your cash flow before you purchase goods or services for your business or hire employees.
Do you need a commercial oven to expand your food business? Feel things are getting busy and you could really use another employee? Want to get a new truck to make deliveries?
Whatever you are thinking of purchasing, get in the habit of first checking your current and your projected cash flow before you invest to see if you can really afford whatever it is at this time.
Understanding Cash Flow = Success
There are many more exciting things to do during your first year of business operations. But there are very few things as important as paying attention to and understanding cash flow. After all, you don’t want your first year of business to be your last.