Small business owners carry a lot of responsibility on their backs. From hiring and firing, to growth and crisis management. As any owner would testify, things aren’t as easy as they look, particularly when you’re talking about cash flow.
Cash flow, or working capital, is critical to any business. In order to stay on top of expenses, a business must ensure that it has enough of a cash buffer in their bank account at any given time. Some industries experience this issue more than others – particularly in professional services. Long payment terms (i.e. Net30-90 invoices), combined with recurring expenses like payroll, often results in a cash crunch. This can be a crippling situation for a business that otherwise appears to be profitable and growing.
That’s the thing – many small businesses have solid receivables that are the result of hard-earned customer relationships. Does that mean they don’t have to worry about keeping cash in the bank? Not at all. These businesses may have unpredictable cash flow that comes in swings. Unless those swings line up perfectly with their recurring expenses, they’re still stuck – something that happens all to often.
But managing receivables isn’t the only piece of responsible cash flow management. Other behaviors of businesses owners can have a major impact on working capital availability and general financial well being. In this article, we’ll discuss 6 things small business owners can do to keep cash in the bank.
Spend some time getting comfortable with your own accounting
While hiring an accountant is a good idea to help take some of the financial burden off your shoulders, that’s not always an option. Quality accountants can be expensive, even part time. Small business owners should take time to learn how to read their own financial statements and balance sheets. They should understand how money is coming in, and where it’s going out. Without that working knowledge, it can be easy for things to slip through the cracks.
One great way to improve your financial literacy is to take an accounting course, offered in person or online. This will help you understand the fundamentals of how to manage your business finances. Whether or not you hire an accountant, it’s a good idea to have your own expertise in order to verify that everything makes sense. It can also help you take ownership of major decisions, whether that’s seeking investment, acquiring financing or hiring.
Optimize your collections process
When you submit an invoice to your customer, you’ve likely attached terms of anywhere from 15-90 days, unless that invoice is due on receipt. With longer payment terms, it becomes more and more difficult to stay on top of collections. At some point, every company will experience issues with getting their customer to pay on time – or sometimes at all. This puts an immense amount of stress on you and the business as working capital gradually dries up. So how do you improve your collections process?
Keep your cool
It never helps to let your emotions get in the way. Getting upset will not likely increase the speed of payment, and it may cause you to lose credibility or authority in the eyes of your customer. Be direct and confident, making sure you’re not coming across as a pushover. Getting confrontational without losing your edge will be critical in making sure you eventually get paid.
Know your rights
Read up on what rights you have when attempting collect from from your customers – you may be surprised what you’re able to do. For example, it is within your legal rights to search for your customer’s social security number if they are refusing to pay an invoice. That said, make sure that you have a written agreement in advance of completing work for your client. That ensures that you have a legal defense when attempting to collect payment.
Keep everything in writing
Not only should you have a contract in writing, you should keep a written record of all correspondence between you and your customer. When you have documented proof of multiple collections attempts, it can prove helpful if you need to hire a collections agency or, unfortunately, take a customer to small claims court.
Offer a discount
If you’re not convinced a customer will ever pay, try offering them a 10-20% discount on their invoice. Outstanding invoices and non-paying customers cause a lot of stress – more stress than the final 10-20% of your invoice amount. While adjusting your fee may not be ideal for your business, it’s a significantly better option than 1) never receiving payment at all, or 2) having to pay a collections agency to get involved. Sometimes, your customer may see this offer as a good opportunity to settle a debt.
Hire a collections agency
If all else fails and you feel as though you’ve spend too much time, energy and stress on collecting payment, hire a collection agency. They know the ins and outs of the law when it comes to collecting on delinquent invoices, and they can often help secure payment faster. Make sure you do your research and find a qualified and registered agency, as you’ll want to avoid any potential legal risk of outsourcing your debt collection to a third party.
Keep personal and business finances separate
As a small business owner, it’s easy to allow your personal expenses to become intertwined with your business. Make sure you keep everything in separate bank accounts, and always keep your receipts for any business expenses. This will make doing your taxes dramatically easier at the end of the year, and it will help you make sure you’re not accidentally using your business’s cash flow to fund your personal life.
Grow and hire responsibly
As you navigate your business through the early days, it can be tempting to grow too fast. Purchasing expensive new equipment, renting excessive office space, or hiring too many employees are all things you want to avoid. Growing responsibly means letting the market drive your expansion. Doing more with less is a good idea until you feel confident that your sales can sustain your next investments. What you don’t want to do is accidentally purchase something, or hire someone, then put your business in a cash crunch that forces you to either sell or fire a new asset.
Consider alternative financing
If your business experiences a consistent cash shortage due to long invoice terms and delayed payment, you may be considering acquiring a loan or investment. However, bank loans are not always accessible for businesses with 1) poor credit, 2) limited operating history, or 3) few/no assets to borrow against. If your business falls into any of these three categories, alternative financing like invoice factoring may be a good option for boosting working capital. Because factoring is a sale of your invoices, not a loan, it minimally impacts your credit. It’s also easier to get approved, and you get your funds almost immediately, unlike most bank loans.