The U.S. Department of Labor estimates 50 percent of U.S. businesses fail within the first five years. The primary reason is poor cash management, the U.S. Small Business Administration (SBA) cites. Good cash management is about keeping your cash as long as possible, and convincing your customers to pay promptly. Keeping a few cash management principles in mind will help you keep a healthy business and stop you from becoming just another statistic.

The Confusion Over Profit

Profit and cash flow are related but not equal, stresses Inc. Your profit and loss statement gives you the simple results of revenue minus expenses. A positive result is considered profit, but you can’t tell how healthy your cash flow is by just seeing a profit. Areas you need to watch include:

• Accounts Payable
• Accounts Receivable
• Inventory
• Capital expenditures
• Level of debt

If customers are slow to pay, resulting in a high receivables, you could see a profit on the books, but a lack of cash in the bank. You could see a profit on paper, but not be able to make payroll or pay your suppliers.

Getting the Bigger Picture

You need to have visibility into your cash flow to know where your company stands, and where you might be in a week, month or year. Future cash flow prediction is an educated guess based on the trends you see in the areas mentioned above, says Entrepreneur.

As soon as you can, get your business onto a consolidated system, so you can easily see the patterns in your business. Cloud-based applications, such as the retail management software from NetSuite, bring together both your online and offline activities to give you a complete picture. Relying on spreadsheets or different applications to track online and offline channels makes it painful to bring the data together so you can accurately predict your cash flow.

When you have the complete picture, you’ll have visibility to such trends as:

• The payment history of your customers
• The accuracy of your planned expenditures
• The ability to cover unplanned expenditures

Without the consolidated view of your performance data, you won’t be able to make those educated guesses needed to plan for your company’s future.

Managing Receivables

Ideally, all of your customers would pay for your products and services at the time of the sale. That won’t necessarily happen as your company grows and increases the customer base by offering credit and special terms. Increase your cash by bringing in more customer payments:

• Give a discount for paying bills early
• Request a deposit when an order is taken
• Get invoices out quickly, and send reminders at 30-, 60- and 90-day intervals
• Once you’ve identified slow paying customers, put them on cash-only terms

Small business owners don’t like the idea of being a bill collector, but the SBA suggests you should do all you can to get something from the customer, because third-party agencies take at least a 30 percent cut if they are successful. Giving discounts as an incentive for payment will let you keep more of the cash in your pocket.

Managing Payables

Keep your cash as long as you can. This improves your cash outlook, especially to banks and investors.

• Use your supplier’s credit terms whenever possible
• Make payments on the last day of your vendor’s cycle — day 29 on a net-30 term
• Use electronic funds transfer (EFT) whenever possible
• Communicate with your suppliers, and build rapport in case you need a break to delay a payment
• Select vendors to work with that have the best terms for your cash flow, not necessarily the lowest prices

Talk to a Factoring Broker

A factoring broker is someone who purchases your invoices, so you use the cash flow immediately for things like making payroll or purchasing needed equipment for the business. This is an excellent solution especially when traditional means of borrowing aren’t available. A factoring broker I highly trust and recommend is Jack Wilson.

A healthy cash-flow is integral to helping you grow your business to the next level. You need cash flow to allow you to hire top talent, beef up your marketing and upgrade your systems. As the saying goes, “you need money to make more money”.

QUESTION: What is your biggest challenge when it comes to increasing your cash flow? Please share your comments in the box below.

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