Monitoring and understanding your cash flow is probably one of the most critical aspects of business management. Cash flow has always been important to businesses, but many business owners have recently been reminded of this in a very unpleasant fashion; i.e. the cancellation or reduction of a vital credit line.
Business owners typically concentrate their efforts on year-end tax planning and strategizing for increased sales in the coming year. It is rare, in the planning process, to see businesses pay equal attention to planning for cash flow by reviewing the business’ credit strategy (the way that bills are paid and the way in which you receive payments for goods and services that are sold).
Following are some tips on things to consider when you review your credit strategy:
• Think twice about paying early on your business debts since you may use up cash reserves that may be critical for survival.
• You may need to consider asking your customers for more financial information to determine whether they have the capacity to pay for goods and services purchased on account.
• You may need to reconsider the length of time that you are allowing your customers to pay on their accounts or you may need to consider asking for a larger deposit or a greater percentage of the total cost of a project to reduce the risk of bad debts.
• Consider taking credit cards, if you are not doing so already, since the bank’s merchant fees may be a small price to pay for not worrying about collecting from some of your customers. It may be more important for you to have the cash in the bank!
• Use the maximum time allowable to pay your suppliers on account unless you will lose the benefit of a discount.
• The economy is still tight and funding is tough to find, so do not assume that your existing strategy will continue to work for you. Instead, be proactive about addressing any policies that might increase your risk for bad debts.
• Clean up your financial statements, strengthen your equity position in your business, and continually monitor your cash flow position.
Article written by Susan Hoosier, Certified Business Advisor and Certified Economic Development Professional, with the Small Business Development Center, which is part of the 24 statewide offices of the Washington Small Business Development Center network (WSBDC).