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The best strategies for small business cash flow focus on techniques for maximizing the prompt inflow of money from sales and accounts receivable and the proper management of expenses and timely payment of accounts payable. That is, good small business cash flow is a product of the careful balancing of money coming in and going out. Specific strategies include increasing customer payment options, incremental billing, customer credit evaluation, prompt follow-up on unpaid accounts receivable, careful monitoring of purchases and inventory levels, and exploring alternative options for paying expenses.
Small business cash flow consists of all the inflows and outflows of money through the business. Business inflows come from the sale of products and services. Business outflows result from the disbursement of wages and taxes, purchase of materials for resale or to support production, and payment of expenses such as utilities, rent, and office supplies.
When a company completes a service or ships a product, it is essential to promptly send a professional, accurate invoice. Payment terms should be stated clearly on the invoice. The more options the business offers the customer, such as accepting credit cards or electronic transfer, the easier it is for the customer to meet the payment terms.
For a service company, incremental billing can be a way to improve small business cash flow. An arrangement such as a one third payment up front, one third when the job is half finished, and the balance upon completion can assist the service company in enhancing incoming cash flow as compared to waiting until the work has been completed. Another option is twice monthly billing for a company that normally invoices customers only once per month.
If a company extends credit to customers, it should have a procedure in place to evaluate the credit of those customers. It should require a credit application and check references. A credit limit established and adhered to for each customer prevents accounts receivable from becoming excessive.
Outstanding accounts receivable must be monitored regularly. The earlier a company follows-up on unpaid accounts receivable, the better chance it will collect. Time should be set aside each week to review unpaid invoices and make collection calls. A business owner who approaches the customer with the attitude that a valuable service or product has been rendered and that the payment is expected will be more successful in getting payment commitments from customers. A customer who has not paid within agreed terms must not be given additional credit.
A careful review of expenses can produce savings to improve small business cash flow. Recurring expense items can be checked for accuracy and possible unnecessary options. Inventory must be maintained as appropriate to sales levels; excessive inventory ties up cash and can result in damaged or non-saleable products if it sits for an extended period.
A company may contact its vendors to discuss modifying payment terms. If the vendor offers a cash discount for earlier payment, it is important to evaluate whether the discount is sufficient to warrant the early disbursement. Paying expenses with a business credit card can also provide a built-in delay before the credit card payment is due. Business credit cards are particularly suited to recurring expenses such as utilities and for vendors who do not extend credit. In most cases, payments should be made on time, but not early, to maximize small business cash flow and preserve the company's credit rating.