Cash flow is the most important aspect of running a small Business and as the story goes it is also the 2nd and 3rd most important aspect of a company’s survival.
So why is cash so important?
From the most basic perspective it seems obvious that cash is needed to pay our everyday bills, however to run a business and plan for the future, cash and cash management require a much greater depth of control. Without proper cash management we may simply run out of cash to pay rent, employees, or complete projects. Without sufficient cash management and payment policies our vendors will think twice about providing their products or services on favorable terms.
First let’s get a handle on the facts by capturing your company’s history of revenue and expenses as well as your sales forecasts, and then we can project cash flow. Of course when projecting these financials there are all sorts of variables that should be considered that may positively or negatively affect your assumptions - ranging from business cycles to competition and collection policies.
Projecting your cash flow is basically a spreadsheet or calendar that is used to calculate not only the difference between revenues and expenses but the timeline associated with each of those factors. This is where your historical records can provide great value. Remember, revenues less expenses equal profit or loss; however profits are not always represented in cash. Your accountant can be a great asset in helping you factor in other variables when calculating cash flow.
Building a collection Process:
Let’s review some ideas to manage the business process of colleting receivables.
· Confirm your payment expectations before, during and after a contract or order is complete.
· Call your client after completed work and confirm their satisfaction.
· Deliver the invoice in person creating a sense of importance and offering an opportunity to ask about expectations.
· Remind them through an automated system that brings your invoice to the top of the pile without appearing to “harass” them.
· Ask someone to call at the first sign that payment will be late and reserve your call for the “elevated” attempt.
Finally, maintain a balance of how much of your cash is tied up in one large client or project that could put you into a spin if unpaid or even with the slightest delays in payment. Consider contractual language or purchase order terms that can be tied to a project and the receivable.
Set aside today’s cash as tomorrow will offer both risk and opportunity and it will be the quick and disciplined that will have the leverage.
Remember, sound cash management is essential for a healthy business and - Cash is King!