Cash Flow Management for Small Business Owners

By Randall Orser | Small Business

Dollar Coin Shows Currency Symbol And Cash TNCash flow is the bane of small business owners. Even if you are working on a large project that takes several weeks, you still have to pay the rent, utility bills, supplier invoices, loan repayments, and employee wages while you are waiting for the big payout of the project. Managing your cash flow is not always easy, especially when some clients extend your terms of payment and delay paying your invoices on time. Providing credit terms over several months can make your customers happy, but can make it tough for your business to pay the regular bills.

You can manage your small business cash flow by various methods. You can encourage your customers to pay invoices sooner, you can invoice in stages for the project, and you can factor your invoices to receive the payment from a credit agency before the customer actually pays the invoice. Some businesses will find a mixture of methods helps to balance the ledger book every month.

Encourage Customers to Pay Invoices Sooner

You can encourage your customers to pay invoices quickly in several ways. Some small businesses only work with cash or immediate payments. Customers pay cash on delivery or via credit cards, or your business does not deliver the product. While this is suitable for some businesses, such as those who use web-based ordering systems, this is less suitable for some businesses.

If you cannot ensure your customers pay for the product or service before delivery, you need to encourage your customers pay the invoice as soon as possible. The longer you extend credit to your customers, the longer you have to balance your cash flow without the income. Some small businesses offer a discount to customers who pay up front, or within a short time, such as 7 days of receiving the invoice. While this is a good way to encourage customers to pay on time, it can be costly to your business, depending on the discount you offer.

Invest in good follow up debt collecting practices. Sending out reminder invoices every week with coloured stickers encouraging fast payment of the invoice can encourage customers to pay the invoice sooner. Follow up with personal phone calls when customers have extended the payment of the invoice outside the terms of payment.

Reduce your terms of payment from 30 days to 7 days, if possible. If your customers do not pay on time according to your terms of payment, you may be able to add a surcharge to the invoice. This is a better cash flow solution than offering a discount for early payment, as the business gains more income when the customers pay late, and does not lose money for encouraging customers to pay on time.

Invoice in Stages

For larger projects over several weeks, set up a contract with the customer that allows you to invoice the client periodically over the course of the project when your business meets the key stages. Agree on what the key stages of the project will be with the customer, and decide on deadlines for each stage of the project. This will let the customer know when to expect your periodic invoice, and you will know when to expect the money from the customer for your cash flow balances.

Factor Your Invoices

Factoring is a relatively new form of credit that some credit companies are offering small business owners. Unlike bank loans with set repayments, factoring offers small business owners much more flexibility. Generally, you will be able to borrow up to 90 per cent of the invoices you have sent to your customers at any one time.

You borrow the cash via a draw down account and when the customer pays the invoice directly to the factoring company, you receive the rest of the invoice amount minus the factoring fee. The fee is usually smaller than interest payments from a bank, and the factoring company can help your business to follow up on the outstanding customer debts, which could save your business from the costs associated with debt collecting practices.

Managing your cash flow is managing the life blood of your small business. Without cash flow, you cannot purchase necessary supplies, pay your bills, or pay employee wages when you need to. Manage the cash flow of your small business by encouraging fast customer payments of invoices, invoicing in stages, or factoring your invoices.

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