Nothing is more important as a positive cash flow to a business. Yet, in a recently published list of typical weaknesses among entrepreneurs, difficulty with managing money ranked among the top. The reasons for this struggle generally fall into two areas. Some entrepreneurs are so positive they will succeed that financial planning seems unnecessary. Others are so uncomfortable dealing with financial problems that they ignore them, hoping they will go away. Whatever the cause, business owners must learn to grapple with their money issues or at best they’ll never realize the full potential of their business and at worst they’ll run into financial ruin. So, here are a few tips to start the new year with positive cash flows.
Get A Reign on Accounts Receivables
If you had extra money to invest, you probably wouldn’t put it into an investment that paid zero percent interest. However, when you allow receivables to go unpaid, you’re giving your customers an interest-free loan. Mail invoices the day services are rendered or the product is shipped. Manage the collection of accounts receivable – don’t assume that all customers will pay in a timely fashion just because they’ve been invoiced. Create a weekly receivables aging report that shows customer accounts that are more than 30 days overdue and politely follow-up.
While collecting your receivables as quickly as possible, the ideal situation is to delay your payables within the terms of your credit. Ways that you can improve the situation are to negotiate better payment terms such as net 45 or 60 rather than net 30. Develop a schedule of your payables to see when possible cash shortfalls may occur. Can a major purchase be delayed?
Reduce the Cash Gap
In simple terms, this refers to the reality that as a business owner, you pay someone for goods or services then at some later date, your customer pays you for those goods or services. The cash gap or cash conversion cycle is the spread of days between your payment of cash to suppliers/employees and your receipt of cash from customers. The longer the time, the more interest a company must pay on cash borrowed from a lender to operate. In addition to the above tactics, another way to reduce the cash gap is to turn your inventory more quickly. By converting inventory to cash, you can reduce inventory carrying costs. While the average cash gap varies by industry, reducing the gap can give you a leg up over your competition and more importantly, give you access to cash flows vital to the success of your business.