Managing the Ups and Downs of Business Cash Flow

Posted on June 18, 2012 · Posted in Blog

According to the U.S. Small Business Administration, only one out of every two new start-ups survives after the first five years of business. That means that half fail, many times due to financial missteps.

Cash flow is a major factor in a business’s success. Regardless of its size, a business’s cash flow drives everyday operations, expansion and purchasing power. As most businesses face continued unpredictability in the local economy, managing the ups and downs of cash flow can have a major impact on reaching future goals.

Few business owners realize what untapped—and often free—resources are available to help them manage finances and stimulate positive cash flow.

To help businesses meet the challenge of effectively managing accounts payable and accounts receivable, here are five simple tips to get business owners on the right track.

1. Pay your company first. A cash reserve can go a long way in making certain that in times of low cash flow, you are able to continue day-to-day operations. Set a simple goal of setting aside a small amount into savings every week.
2. Create a cash flow budget and track expenses. Even if your business is profitable, it’s important to keep a budget and continually track monthly operating costs and income. Always knowing the state of your business’s finances allows you to spot red flags and issues before they become unmanageable.
3. Don’t let past due accounts slide. If you’re having trouble with receiving payment, re-invoice three to five days after the account is overdue, make a phone call or send an email. Often times your customer simply mis-placed or lost your invoice. The longer a business waits to get paid, the less likely they are to receive all of the payment or even get the funds.
4. Focus on your largest debtors. Manage customers who owe the most. Stay on top of them to ensure that their cash flow problems do not become yours.  Maintain a strong relationship with their accounts payable department, consider putting them on an electronic or automated payment program and most of all make sure you are the first to know if they get into financial trouble.
5. Consider giving a discount for paying within 20 days. Depending on the nature of your business, it might make sense to offer a slight discount for those that pay by credit or debit within 20 days of the invoice.

In addition to cash flow management, financing can help provide business capital. Understanding financial options can help manage everyday expenses and purchasing needs. There are three primary ways to meet financing needs.

1. Business loans. For businesses that meet all credit and financial criteria, a conventional business loan allows for an infusion of cash that can allow a business to expand, buy necessary equipment or meet cash needs. SBA loans can be a great option for many businesses. The time to take out a loan or set up a line of credit is when you don’t need it. If you wait until you need the cash or get into a cash flow bind, it may be too late. For information on SBA loans, visit www.sba.gov.
2. Credit card. A business credit card can be used for everyday spending and has a set repayment schedule which can help to manage your vendor payables.
3. Credit line. A credit line can provide cash in a crunch to help cover the cost of operating expenses, unexpected expenditures or the purchase of additional inventory. A line of credit is not the right option for the purchase of capital assets, which might be better suited for a business loan. A credit line is great for purchases that are too large for a credit card but are not large enough to warrant a business loan.

Source: www.mibank.com.

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