How to Maintain a Healthy Business Cash Flow

One of the most common problems of small businesses is cash flow. A business can have all kinds of money coming in each month, but if it doesn’t come in at the right time, financial chaos can happen. Bills go unpaid, paychecks bounce, and business credit is ruined. Maintaining healthy cash flow is a combination of skill, experience and business savvy. Luckily, your CPA is a master of helping to ensure a good cash flow. But you need to know what practices to implement in your business so you, too, can become adept at ensuring there is always cash available to continue operations. 

Closely Monitor Cash Flow 

When it comes to cash flow, it’s good to be a micromanager. Keeping an eye on your cash flow accomplishes two things; you’ll sleep better knowing exactly what position you’re in, and you’ll be able to more quickly identify potential problems before they turn into a financial crisis. Your CPA and bookkeeper will also be keeping an eye on things, but a second or third set of eyes never hurts, either.

Invoice Immediately

Invoices should go out immediately after services have been rendered or products have been ordered. Remember, the payment terms time clock starts as soon as the invoice goes out, so you want to take advantage of that. Just a one-day delay could put you in a financial bind when the time comes for payment.

Reduce Payment Terms

If you continue to have cash flow problems, one of the issues may be your payment terms timeline. For many businesses, 30 days is the standard. But many small businesses are now moving to 14 days or even 10 days, so if this could benefit you, then your clients will likely find it perfectly acceptable. 

Offer More Payment Options

When you give your clients more ways to pay, you are simultaneously taking away more of their excuses not to pay. Don’t be shy about offering every single possible payment option, even if they overlap each other in terms of method of payment. For example, you can offer your client the option of paying you directly with a credit card, or with PayPal, both of which allow your client to use their credit card for payment. Other payment options include:

• Cash App

• Venmo

• Payoneer

• ACH

• Stripe

• and more

Get a Line of Credit

Approach your bank or another financial institution about giving you a line of credit. If you do get into a cash flow snafu, you can dip into the line of credit to cover necessary expenses. Just be sure to pay it back when the money starts flowing again so you always have that lifeline available to you.

Stash Away Savings

Financial experts always recommend having a savings account with at least three months of expenses put by. Do this for your business, and you’ll never have to worry if the company’s cash flow dries up for a few weeks. Again, replenish the savings once the cash flow returns to normal.

Change Fee Structures

Take a hard look at the fee structures you have in place. For clients who already pay a lump sum each month, or per large project, consider having them pay ahead in weekly installments. You can put it to them that this is for their benefit, so they can avoid having a big payout due all at once. For clients who pay smaller fees for multiple, smaller projects, change their fee structure into a retainer. This will eliminate the need to track multiple invoices, and give your business larger payments that you can rely on each month.

Require Up-front Deposits

For long-term projects, require up-front deposits that must be paid before work commences. This ensures that you have the cash to pay for what you need to do the work, and it invests the client in the project. 

Avoid Payment on Approval Terms

Never allow payment terms to be in the hands of the client. This is a common mistake that new business owners make. You’ll always get a client that stonewalls or delays on approval for this or that reason. Meanwhile, you’re not getting your final payment. Always insist on payment before final delivery, and then build in revision requests for free or fee-per-revision terms. This motivates the client to pay that last invoice, so they can receive their product or service. 

Practice Collections Weekly

Don’t let receivables go overdue more than a week without making collection calls. The longer you wait to reach out regarding an overdue bill, the less likely it will ever be paid. Let your clients know you’re serious about due dates by staying on top of collections.

Ask For Payment Terms From Suppliers

Depending upon what kind of business you’re operating, you might be able to get payment terms from your suppliers. As long as you have a good history of paying on time, your suppliers may be able to offer you 30, 60 or 90-days payment terms. This will also help your cash flow situation by enabling you to hold onto cash a while longer.

Avoid Cash Dumping

As a tax strategy, many companies spend as much as possible, and pay all their bills. This reduces their yearly profit and subsequent tax bill. But this is only a good strategy if you do it judiciously. You shouldn’t leave your business with no cash in January, especially since this is when many business products go on sale, and you could save money by purchasing supplies and equipment in the first quarter. Your CPA can help you to determine how much cash you can safely “dump” at year’s end without leaving yourself in the hole in January. 

Maintaining a healthy business cash flow requires a proactive approach. By understanding your cash flow, managing receivables, controlling expenses, and maintaining a cash reserve, you can ensure that your business remains financially stable. Regular monitoring and strategic planning will keep your cash flow strong, enabling you to focus on growing your business and achieving long-term success. Contact your CPA for more helpful ideas.

by Kate Supino