Managing Your Cash Flow Part 1
Posted by Gail | Filed under Money Management
For all you people who have been banging down my door with requests for stuff for small business, today’s post is the first of four on managing your cash flow. Whether you write articles, bake cakes, produce television, build websites, cut grass, fix cars, create artwork, build kitchens… I could just go on and on… if you work for yourself (even if you work by yourself), you have a small business. And if you aren’t paid in cash the minute you’re done, cash flow management is likely one of the most important money skills you can have. Enjoy.
One of the make-it-or-break-it skills in running a small business is the ability to manage cash flow. The way money flows in and out of your business will not only affect how much you can take home to the family coffers, it’ll affect your need to borrow and your supplier relationships since you have to have money to pay bills.
It’s been estimated that over 60% of business don’t survive five years and that the main reason for failure is bad cash management. Loads of small business managers and self-employed people neglect their cash flow until it is too late to recover.
In it’s simplest form, cash flow management means getting the money customers owe quickly while paying your own bills at the last possible moment without incurring interest or fees. But it involves many components from bank accounts, to accounts payable and receivable, to inventory management. In essence, effective cash flow management means squeezing every penny out of your daily business.
1. Get Your Money. If you got paid for sales the instant you made them, you would never have a receivable. In the real world you likely have to cut an invoice and then wait to be paid. The longer it takes for you to collect the money you are owed, the more strapped your business cash flow will be.
It may seem obvious but the first step in getting the money in the door quickly is letting the customer know what he needs to pay. That means sending out your invoice as soon as you can – not a week or two later when it’s ‘convenient’ to batch process the invoices. Every invoice should indicate when the payment is due, along with the penalty for late payment… and, yes, there should be a penalty.
Track your accounts receivable to highlight — and avoid — slow-paying customers. For clients who are chronically late payers, instituting a COD (cash on delivery) policy is a better alternative to refusing to do business.
Once you receive payment, deposit the cheques immediately. Every day you hold a cheque for deposit, means one day’s lost float. And if you wait until Monday to deposit the cheques you got in Friday, well, there’s three day’s worth of float gone.
One way to get money in the door faster is to ask customers to make deposit payments at the time orders are taken. Another is to incent clients to pay quickly by offering a discount. Careful now, don’t make the discount too big. A 1% or 1.5% discount is more than adequate. And watch the date. Don’t let clients claim the discount if they do not pay within the grace period offered.
If you are penalizing for slow payment make sure the “late fee” is clearly stated; a 2% per month late fee is pretty standard.
Just because you’re charging a penalty doesn’t negate the need for you to call a client who is late. That call could move your invoice to the top of the pile, especially if it is your third or fourth call and the customer is getting tired of fending you off. You should have a policy for when you will send a “collection letter” and when you will turn an account over to a collection agency. Do I have to say that you shouldn’t keep shipping/doing more work if the customer isn’t paying? If your COD policy isn’t working because when you or your delivery shows up there’s no cheque, put a hold on everything until the account is paid in full.
Keep in mind that customers may have set dates in the month when they pay invoices. Find out what they are and build those dates into your collection procedures. This goes for people for whom you may be working too. If you don’t you could miss a customer’s cheque run and that might mean waiting another month and that directly affects your cash flow.
February 22, 2010 at 7:55 am
Thats a good start to how to cash flow a business properly. I sure hope there is more. I have a friend who has a small business and I’m sure she could use all the help she can get on cash flowing a business.
regards,
Jason
February 22, 2010 at 8:38 am
Thanks for this, I own a small business, and have just begun to extend “credit” to wholesale customers. I hadn’t until I was approached by the provincial government actually as they don’t pay until they get the goods and they don’t use credit cards to pay (at least in this division).
I had to chase them down for payment.
I’m glad it happened early though, because I created new terms for all new buyers who want to have credit extended to them. I now keep a credit card on file, and I have a signed agreement stating that if their account lapses 45 days, I will charge the full amount plus 15% as a handling fee. Haven’t used it yet, but I’m sure the more wholesaling I do, the more likely I’ll use it.
February 22, 2010 at 8:40 am
Thanks for this series Gail. My husband is starting a business and this is one of his concerns. Look forward to reading tomorrow’s blog.
February 22, 2010 at 9:01 am
Thanks for this series Gail. I’m self-employed and have been looking to make some changes with my business finances. I know how to run my business, but not how to maintain it. I’ve made mistakes in the past and am determined to not repeat them this year when my yearly contract payment comes in.
I’m most eager to hear more of what you can shed light on for the self-employed and broke crowd.
February 22, 2010 at 9:56 am
Very educational post! looking forward to reading the next one tomorrow.
I would enjoy, for people who have a small business if they could mentioned what kind of small business they have. It would be inspiring to read.
February 22, 2010 at 9:59 am
Also, for those who don’t have a small business but are thinking of starting one or would like to start one (even if its only a state of a thought for now), please share with us what this business would be. Im curious to see all the nice ideas that are out there.
February 22, 2010 at 10:04 am
Another common invoicing practice is to offer an early pay discount to your customers: 2% 10 net 30, for instance. Your client gets a 2% discount if they pay within 10 days, or they pay the full amount if they pay in 30 days.
February 22, 2010 at 10:55 am
My husband had a small business where he was the only employee, for about 5-6 years, and the cash flow part ran fairly well, mainly because my husband had only one client for which he provided fulltime service, so only one monthly invoice to prepare. Eventually he closed down the business when that client offered him a fulltime position within their corporation. But I can see how quickly the invoicing could get confusing when dealing with several clients who come and go regularly. In his situation it was fairly simple to invoice and follow up on one client, but tips like the ones Gail is providing here are very helpful for other types of small businesses for sure.
February 22, 2010 at 11:20 am
Off topic, but slice.ca is featuring updates on couple’s on TDDUP (yay! way to go slice + Gail)! I’m probably being a ghoul here but I was pleasantly surprised at how many couples were still together. Perhaps money keeps couples together, too eh?
February 22, 2010 at 11:36 am
Gail, thanks for writing this series. I’ve been self employed since the birth of my dauughter 2 years ago and am fairly new to the working for myself world.
Although I don’t have a cash flow problem as payment is expected as soon as a customer purchases goods (I sell fabrics and sewing patterns), I’m looking forward to reading the rest of this series. There are other areas of my work life that I need to improve (like time management
)
The website link for this comment goes to my personal blog but for those that are interested in the work I do, you can read the “About” page on that site.
Thanks again Gail for writing this. Quite difficult to find info about how to run a small business without having the author try to sell you a “get rich quick” type of product / course!
February 22, 2010 at 11:43 am
Great advice, Gail. We’ve been doing the self-employed thing for about 5 years now, and I can tell you we had to learn the hard way about making sure there are late fees built into the invoice! I look forward to reading more on this topic.
February 22, 2010 at 1:12 pm
I have tried the late fee strategy and the early discount strategy, and I have to say the early discount gets WAY better results for me. I guess they feel they “got a deal” if they pay right away… all good for my cashflow and their egos.
I am guilty of the batch invoicing. Sometimes the jobs are so tiny that I just want to wait until there is enough to make it “worthwhile”, and with one client it meant invoicing quarterly…. silly silly me.
Thankfully MOST of my clients are good about getting me paid right away, and the slackers just need regular email reminders. My overhead is very low with my business, it is service based not inventory based, I think that helps take the pressure off considerably!
February 22, 2010 at 1:47 pm
Unrelated: Thank you to Iryssa who suggested the $5 dinner website. On that site I found a recipe for making laundry detergent. With kids in cloth diapers I can easily do 3 loads of laundry per day. Homemade detergent will save us almost $40 per month.
February 22, 2010 at 6:13 pm
I second Amelia’s post…I have become fond of http://www.5dollardinners.com after seeing Iryssa’s comment. Thanks for the fab tip.
February 22, 2010 at 6:18 pm
This unrelated too :
I just switched my internet and home phone to Shaw in BC for a 12 month $19.95 a month deal. I figure it will save $600 in the 12 months.
Thank you Gail. On TDDUP you have talked about reducing your individual expenses and then figure out how much over time it will save you. This will help us get through my mat. leave a little easier and make the budget work better!
February 22, 2010 at 10:40 pm
Thank you Gail for putting this topic up. My husband is thinking of being a contractor himself and this is info we/I need to know! I am looking forward to the rest of the entries in this series.
February 23, 2010 at 2:18 pm
Thanks Gail for another great piece of information. I’ve just twitted about your article. Hopefully our clients will come and visit your website on a regular basis.
Keep on the fantastic work.