Many small businesses operate with fairly narrow margins. A single incident – a repair, a capital expenditure, property damage, or a non-paying client – can throw the business into chaos. For this reason, it’s important for small business owners to develop a talent for managing cash flow. And while this blog won’t help you attract more business, it does offer some tips for freeing up cash flow.
Determine the Right Time to Pay Bills
Many companies consider it good practice to pay bills precisely on the due date in order to hold onto the cash as long as possible. If you can afford to do this, it’s a good idea, but understand that you may be missing some opportunities for discounts due to early payments. Examine your accounts payable thoroughly as well as your invoices due and see if there are any opportunities to save money by paying earlier.
If you have to prioritize which bills to pay and when, plan on paying the ones that are past due, due today, or those that carry penalties for late payment.
Keep an Eye on Your Receivables
One metric small businesses should always track is the accounts receivable turnover. If your customers are consistently paying you late, it may be squeezing your cash flow, so it’s a good idea to get a handle on this key performance indicator.
Your accounts receivable turnover can be determined using a ratio of average accounts receivable for a period divided by the net credit sales for that same period. This ratio will offer you a better idea of how efficiently your business collects on debts owed toward credit it extended. A lower number is more desirable, as it shows higher efficiency. If your number is too high, you may want to consider tightening your payment terms for the “repeat offenders,” or even offering early payment incentives of your own. Going forward, you may want to utilize the services of a credit reference service for new customers so you can be cautious about taking on companies that are notorious for paying late…or not at all.
Modernize Your Accounting System
One of the best ways to stay organized and on top of your business’s cash flow is by using an updated account management solution that allows you to invoice – and customers to pay you – right from the solution via credit card or funds transfer. It can also help you save time and money by eliminating paper invoices and making life easier for your accounting person or department. You’ll also appreciate the advantages such a solution can offer at tax time. Most of today’s popular accounting solutions can even be tied in with your sales software, your customer relationship management (CRM) platform, and other vital applications.
Apply for a Line of Credit
It’s a good idea to expect the unexpected when running a small business, and an eventual cash crunch is one of those things you should expect at some point. Consider putting a line of credit in place before you need it, so you can use it immediately or anytime the need arises.
Consider Hiring a Bookkeeping Firm
While there is certainly a cost involved with hiring a bookkeeper, this person could help you optimize your cash flow, so it will likely be worth it. DOAAR is a small business bookkeeping, tax, and consulting services firm, with an additional focus on its client’s personal finances. Specializing in bookkeeping, controller, and CFO services, DOAAR’s offering spans daily accounting, month-end close, complex financial modeling, and oversight. From execution to analysis and strategy, DOAAR provides clients a powerful and fully integrated back-office accounting solution. We have locations throughout California and the rest of the U.S. Visit our website for more information or to contact us.