Cash flow is king. It flows into your business from satisfied clients who pay your invoices, and it flows out as you pay employees, suppliers, and others who serve your business. And, if you play your cards right, some of that cash flows into your own pockets as a return on your investment in your business.
Keeping an eye on your company’s cash flow is as important as watching the fuel gauge while driving a car. In fact, poor cash flow is a big reason why one in every four businesses won’t survive its first year, and why more than half of businesses don’t survive past the fifth.
If your company is running low on gas and you’re not sure why, here are a few trouble-shooting tips to help you keep cash flow balanced.
1. Keep good books
You won’t be able to figure out where the money goes if you don’t track it. It’s crucial that you track money movements such as:
- Invoices issued to clients
- Invoices paid by clients
- Invoices received
- Invoices paid
- Taxes withheld
A good accounting software solution can help you keep this information up to date. Some cloud accounting solutions—like FreshBooks—automate the invoicing process and flag late and unpaid invoices, so it’s easy to stay on track with your cash flow.
2. Watch your accounts receivable
The longer the period between the date you issue an invoice and the date you receive payment, the lower your bank account balance can sink.
To avoid cash flow issues, when you submit a project proposal or contract, be clear what your payment conditions are. Likewise, when sending an invoice, ensure that the payment terms are clear on the invoice.
Research from FreshBooks shows that using the words “21 days” as opposed to “Net 21” in your payment terms gets invoices paid more often and faster. While the words “Net 21 days” or similar makes sense to most business owners, that kind of wording may not be as clear to less business-savvy clients or consumers.
The same research also found that being polite matters. A simple “please pay your invoice within” or a “thank you for your business” can increase the percentage of invoices paid by more than 5 percent.
3. Follow up on bad debts
If a client is past due, you need not involve shady characters and baseball bats. Try emailing a friendly reminder with the details of the payment in the body of the message. It can read something like this:
I wanted to follow up on the invoice for the (project work) I submitted on (date). That payment hasn’t yet come through. Could you please check on it for me? Here are the details:
If you have any questions or concerns, feel free to call me. Of course, if you have already sent payment, please disregard this notice.
An easy way to stay on top of these reminders is to schedule follow-ups to email messages, including phone calls, until you receive payment.
Some cloud accounting solutions enable automated late payment reminders, so you can avoid the late payment dance altogether.
4. Schedule your bill payments
Schedule payment of your bills to happen on the day before they are due. This is what professional organizations like utilities and credit card companies expect. This is one tactic that slows the speed at which cash flows out of your business.
5. Make your terms work harder for you
Large organizations hone their accounts receivable processes to maximize their own cash flow. Would any of their payment terms work for your business? If you think the answer is yes, implement the terms for a fixed period and track the results. If the changes in terms help you get your money sooner, they’re worth keeping.
6. Forecast your cash flow
Keep track of variances between forecast and actual cash flow. Unless your forecasts are off (and they might be—predicting future cash flows is more art than science), those variances can signal issues you need to deal with. An accountant can help create a cash flow forecast with you. You’ll be able to see which times during the year you can expect to see a cash deficit, and which times during the year you’ll expect a surplus. This will give you a pretty good idea how much cash will be required over the coming months to run your business.
Forecasting cash flow and then comparing actual figures against it can also help identify areas of the business that require extra attention. If you see an unexpected discrepancy between the two, you can examine further and identify where spending may be out of control. For example, your electricity bills may be climbing, which could indicate a need to review your building’s energy efficiency, or search for ways to save energy.
Young businesses often face cash-flow problems during the first few years. Paying close attention to these issues and troubleshooting along the way will help keep cash flowing into the business.
Have other great troubleshooting tips for solving cash flow issues? Let us know in the comments below.