Four Simple Steps To Improve Your Cash Flow

Cash flow is the life blood of any small business. We all know it, but we don’t all live it.

Many small business owners focus on the “fun part” of what they do. Countless entrepreneurs start their companies so they can pursue their passion and utilize their talents.  That’s a primary reason people pursue business ownership.  Successful entrepreneurs enjoy the hunt: increasing customers and growing sales revenue. Let’s face it, landing a big, new contract can be exhilarating.

Making the sale frequently becomes the easy part; finalizing a deal at terms that make your company profitable, billing clients in a timely fashion, and collecting money in full is often easier said than done.  It can be tempting to cave into a tough negotiating prospective or existing client. His job is to buy at the lowest cost possible. Meanwhile, your goal is to negotiate the highest price you can get. I’ve repeatedly encountered business owners who are too willing to discount their goods and services. This can quickly put companies into a cash crunch.

Further, time lags can be devastating. Clients who pay on 60, 90 or even 120 days (often the case for doctors waiting for payments from insurance companies), take their toll on business owners. As accounts receivables climb higher and higher, on paper, a company might looks profitable, yet in reality, the business could be drowning. Staff has to be paid, rent payments become due, and inventory has to be replenished.  While money goes out the door, it may not be coming in fast enough and in sufficient quantities.

Here are four tips to keep in mind when seeking to improve cash flow:

1. Establish payment terms — not only the price but when you expect to be paid.

2. Bill your customers — if you don’t bill them, they won’t pay you.

3. Keep on top of your receivables – know how much you are owed.

4. Call every customer whose invoices are past due – don’t wait until it’s too late.

Admittedly, these are not the fun parts of running a business. Restaurateurs love to cook, show off their creativity, and engage their customers. None of them want to chase after customers who do not pay their tabs.

If much of this advice sounds like common sense, it is. Yet according to business growth guru Dawn Fotopulos, the author of the award-winning book, Accounting for the Numberphobic: A Survival Guide for Small Business Owners, far too many business owners are not focusing enough on making their firms as profitable as they can be.

“Far too many small business owners do not know how to read their balance sheets, chase unprofitable accounts, and are too lackadaisical in chasing payment for their work,” Fotopulos explains. “They have to understand that without cash flow, their companies will not succeed. The reason you open a business is not to generate sales, but to make money on those sales — and do it promptly to ensure steady cash flow.