Cash Flow Tips for Small Business Owners: Optimize Pay-Outs and Pay-Ins
Cash flow refers to the movement of cash in and out of the business during the specified period. The aim of all businesses is to maintain a healthy or positive cash flow or pay-ins or amounts the business received during a specific period remaining greater than the payouts or payments made by the business to meet its obligations during the period.
Delayed Pay-Outs
The best cash flow tips for a small business is delayed pay-outs and early pay-ins. This involves buying on credit and selling on cash, preferably settling supplier due dates after sales, or negotiating a longer payment period with suppliers and a shorter payment period with customers.
The extreme form of such an approach is the zero working capital approach and a business strategy ingrained with Just-in-Time (JIT) methodology. In this approach, companies fund operations without any working capital, funding entire operations related to a transaction with cash collected from the specific customer and pocketing the profit. Some business environments, however, makes adopting this approach unfeasible.
Early Pay-Ins
The best way by which businesses can improve their cash flow is by requesting a down payment or advance payment for products or services. However, at times, competitive pressures and generally accepted business norms might require selling products and services using a deferred payment method, or offer payment in installments, even though suppliers will still expect their payments on time. In such cases, business owners need to negotiate for quicker payment or down payments from customers in exchange for a discount.
The best practice when drawing up contracts that involve delayed payments is to insist on payments within 30 days of delivery.
In cases where payment comes in installments over time, insist on automated credit card transactions that credit the amount to the bank account without having to make efforts to collect the payment.
Many times, even customers practice the principle of delaying payouts to boost their own cash flows! Companies would do well to pursue payments due relentlessly, for it not only improves cash flow but also reduces the chances of eventual default. An efficient system to keep track of receivables and a sound system to follow up and collect payments are valuable tools in cash flow best practices.
If customers do default, a good idea is to offer a settlement waiving penalties or even a discount on the original bill, but only on immediate payment. Customers who default will most certainly do so in a revised payment plan as well, however. Such an approach always has the danger of encouraging customers to default to obtain better payments or discounts.
Factoring
Another cash flow tip for a business is to discount account receivables by factoring.
Cash flow notes are legal and binding security-backed promissory notes where the debtor agrees to pay a creditor fixed sums at stipulated periods, usually monthly. Companies can issue cash flow notes against accounts receivables due, securing money upfront from an investor who purchases the cash flow note against future account receivables from the purchase order. Depending on the discount offered, investors readily purchase such cash flow notes.
Even without cash flow notes, it is possible to factor or discount accounts receivables using factoring companies and invoice discounters, who take a discount depending on the length of the receivable. Such factoring, besides improving cash flows, saves the hassles of following up on account receivables and transfers the risk of bad debt to the one who factors the debt.
Optimizing Resources
A great cash flow tip for a business is to find ways to generate more cash.
As the adage goes, rolling money gathers more money. Businesses would do well not to keep excess cash in bank accounts and rather invest them aggressively, either in safe financial instruments that provide a healthy return, or in the business itself to achieve better economies of scale and generate more profits.
Other ways of optimizing company resources are by rationalizing the workforce, reviewing product mix to market high profit items more aggressively, leasing out or surrendering space not needed, reviewing terms of lease to explore better options, and more. All such actions improve efficiency, contribute to enhanced profits, and improve cash flow.
Effective Financial Control
Good cash flow management requires tight control over finances, especially aligning payouts with pay ins to ensure the company retains a healthy cash reserve and does not have to borrow short term funds to meet its obligations.
Another small business cash flow tip is delayed or measured withdrawal of funds by the business owner. Very often, the business owner withdrawing funds from the business account for personal for non-business purposes creates a cash flow crunch. Business owners can withdraw their share of remuneration and residual profits, but the best practice is to withdraw only the actual profit or share due, and delay the same to provide priority to the company’s operations for the month or period.
The success and very survival of a company depends not on profitability, but on healthy cash flows.
Many companies show profits in their accounting books but have no cash on hand. The reason is poor cash flow management. The profits remain blocked as unrealized payments, and company operations devour the cash realized. This has a spill over effect every month, and unless the company invests fresh funds and improves the scale of operations, it becomes difficult to extricate itself from such a cash crunch cycle. The profits that such companies show are notional, and such companies run at loss for all practical purposes.
References
- Australian Business Funding Center. “Small Business Resources - Small Business Cash Flow Tips.” https://www.australiangovernmentgrants.org/cash-flow-tips.php. Retrieved April 24, 2011.
- Maryland Association of CPAs. “Cash flow tips to keep your business in the black.” https://www.macpa.org/Content/23555.aspx. Retrieved April 24, 2011.
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