Cash flow basics for small businesses

Over 90% of business failures are directly related to problems with their cash flow. Having a positive cash flow is important not only for the success of your business but for the investment you have made in yourself. Cash flow boils down to 3 main things, accounts receivable, accounts payable, overhead expenses. This article will discuss how you can properly manage your cash flow so you can stay in business for a long time.

One thing you need to realize is that just because you have money coming doesn't always mean you have a good cash flow. Take a look at your accounts payable and your overhead expenses, is the money coming in enough to cover these costs and allow you to make a profit?

Many small business owners make a fatal mistake with their customers; they give them the option to pay later. While it's nice to have leeway on when you need to pay an a bill, your business is assuming this cost until you finally receive the payment. Invoicing is a standard for most businesses, however many of them fail to properly collect on their hard-earned money. Regular and prompt billing is the only way to help your cash flow stay positive. While billing is often time consuming, you need to spend time doing it. Have one of your employees do it as part of their job duties; this is a great way to increase their responsibility. If you are investing a lot of money into your customers, ask them to pay part of the bill up-front. This way you have at least the overhead costs covered.

Some customers will try to take advantage of your billing. To combat the slow-payers, start charging them interest. Be detailed about your billing so your customers know when they need to pay before you start charging them interest. Don't be afraid to use a collection agency for the companies that just won't pay. Once an order is placed, the bill needs to go out when the product is shipped. This is the best way to stay on-top of your billing. Send a bill every 2 weeks until you receive payment and make sure to charge late payment fees if you don't receive part of the payment by the due date.

If you have had problems with some businesses paying on-time, be careful about working with them again in the future. Do some research on some of your clients before you work with them. For example, if you plan to offer invoice billing, you need to make sure this person has a history of paying on-time and in full. A shocking statistic you need to know is that 66% of late payments come from large companies that owe $500 or less. Do a credit check if you are offering large financing amounts. Another way you can determine if you want to work with this company is to contact some of their vendors and other companies they typically do business with. They will let you know if they pay their bills on time and if they are good to work with.

Take a look at some of your accounts payable, when is the payment due? Are there penalties for early payment or for late payment? When you keep track of your payment due dates, it makes it easier to control your cash flow. You can invoice your customers sooner so you can receive payments to support your accounts payable. Instead of offering Net 30 terms, only offer Net 15. This helps your customers pay their bills faster so you have your money quickly.