3 Ways to Beat the Small Business Cash Flow Crunch

What do 90% of business failures have in common?

Lack of cash.

Cash is king. According to Dun and Bradstreet, 90% of business failures happen because of poor cash flow. In today’s fragile economy, maintaining a strong positive cash flow for your small business is more important than ever.

Cash Flow Basics for Small Business

Well, duh, right? Any high school economics student can tell you positive cash flow is important to a small business. But knowing about cash flow and keeping a positive cash flow for your business are two different things. So what do you need to consider when it comes to your business’ cash flow? Three factors affect cash flow:

- Accounts Receivable (cash flowing into your business)
- Accounts Payable (cash flowing out of your business)
- Overhead Expenses (a subset of accounts payable)

In this article I give you three ways to increase the cash flow into your business.

3 Ways to Increase Cash Flow into Your Business

If you accounts receivable records look good, your business cash flow should be good, right? Wrong. A positive accounts receivable column only helps your business if you can convert your receivables to cash. Your business’ accounts receivable is a listing of money owed to your company. But being owed and having cash in hand are two different things. So how do you turn accounts receivable into cash faster for your small business?

1. Bill Promptly and Accurately
Another “Duh!” suggestion, but you might be surprised at how many small business owners are guilty of neglecting regular and prompt billing, viewing it as another paperwork hassle that goes on the back burner. If your small business doesn’t bill promptly, start now. Assign an employee to handle this task if necessary. When working on long-term projects, arrange to bill monthly for work-in-progress and ask for a deposit before you start the project. Also, be very careful and detailed in your billing. Nothing strains a good business relationship like billing errors. Review your bills for errors and omissions before sending them out.

2. Avoid Slow or No-Pay Clients
You might be amazed at the kinds of clients who are slow to pay, or totally delinquent. According to Dun and Bradstreet, the worst slow-pay offenders are large businesses, those with 500 employees or more. On average, these businesses take 62.7 days to pay up, more than 4 weeks past normal 30-day terms. Here’s the other shocker: the most common no-pay offenders are clients who owe $500 or less. Apparently, these clients feel that this amount of cash is insignificant, and don’t feel guilty about not paying up.

Before you take on a new client or extend credit to a client, do your homework. You can do a credit check on all new clients using an outside agency, or request credit references and do your own checking. Another option is to call other businesses that do business with your client to learn whether the client pays on time. If the potential client turns out to be the slow/no pay type, don’t take them on. In lean economic times it may seem crazy not to accept all the business you can get, but clients who don’t pay up can seriously and negatively affect your cash flow. Not only will you wait endlessly to get paid for goods and services already delivered, but you will also spend a lot of internal resources tracking delinquent accounts and chasing your cash. The best policy is: “Just say no!”

3. Plan for Fast Cash
There are two ways to get your clients to pay up sooner. First, you can negotiate short payment terms when you contract with a client. These days, many small businesses are asking for and getting “net 15″ terms. See which if your clients might be open to these terms. Second, if you’re not comfortable asking for “net 15″ terms, you can offer clients a discount for early payment. Offer a one to two percent discount for paying within 10 days. While you’ll be losing a little cash to the discount, you’re overall cash balance will be a lot healthier.

These three simple strategies for cash flow management can be the difference between your small business operating in the black or becoming one of the business in the 90% failure bracket.

Do you have your own unique ways of preserving or increasing the cash flow into your business?

If you enjoyed this post, please consider leaving a comment or subscribing to the feed to have future articles delivered to your feed reader.

Photo credit: Stimulus Package

Tags: billing, business failure, increasing cash flow, payment terms, small business