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TIP: Improve Your Cash Flow

Tip of the Month

August 2006

TIP: Improve Your Cash Flow

Tough as it is to sell and market your services or products, no matter how good a sales person you are, you won’t get rich - or even stay solvent - unless you know how to collect your money. Small business owners often wear many hats, and it is easy to get caught up in sales and pay insufficient attention to managing cash flow. Here are a few basic tips to improve your cash flow. If they are not part of your business protocol, it may be time to make some changes:
  1. Ask all customers for a down payment on projects so that you don’t have to fund the project on their behalf.

  2. If the work requires you to purchase costly items or services needed to complete the project you are managing - or if the project involves miscellaneous significant out-of-pocket costs (e.g. travel, printing costs, etc. etc.) - set a dollar ceiling for those you are willing to pick up and bill back to the client. Require vendors to submit large invoices directly to your client for work/items that exceed your ceiling. That way if your client is slow to pay your invoices, you don’t get stuck with a vendor’s bill for pricey items like paper and color printing, or expensive fabrics and decorating materials.

  3. Before you start work, provide your client with a written contract that states your payment terms. Apart from asking for a down payment, consider requesting a further interim payment, or payments, before the final amount is due. Be sure your contract makes it clear that you expect full payment on completion of the project, that all invoices are due on receipt, that you do not extend credit to clients, and that interest will be levied when bills are more than 10 days past due.

  4. If possible, negotiate credit terms with your vendors for 30 or 60 days, to give you a chance to bill and collect payments from your clients before vendors’ bills are due.

  5. Have a collection process in place and be diligent in pursuing slow payers. When your clients don’t pay you promptly they are using your hard earned money. Follow-up all past due notices with polite but firm phone calls. If you get nowhere with your client’s accounting personnel, don’t be afraid to contact the principals to request prompt attention to your invoices.

  6. To make sure you are not caught in a cash crunch, arrange a line of credit at your bank to be used in an emergency. It usually costs less to cover a cash flow shortfall this way than to pay the late fees or interest rates imposed by vendors.
Finally, be prudent and disciplined about withdrawing cash from your business. If you reduce your cash flow, you’ll have less money available when you need it to fund business expansion and pursue growth opportunities.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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