Cash flow is always a term of emphasis when talking to business owners about how their business is performing. Money in and money out, is the universal element in keeping a business healthy and alive. So if the concept is so simple, why does it feel like an impossible equation at times?
In theory, a business performs work, invoices the client, gets paid, pays the bills, and repeat. Any weak link in the survival chain can throw how the business operates into a tail spin. Did you notice in the simple equation above that it consists of one part sales and three parts accounting. Even though sales are a major component of your business, 75% of business success is in the details. Detailed accounting work if neglected can be detrimental. Here some examples:
Invoice consistently – Work performed is only as good as when it is billed. If the business is failing to invoice consistently, or does not have a system to know when a project is complete, then invoicing is delayed. A delayed invoice could result in an additional 15 days of terms. So if the original invoice is Net 30 and payment occurs in 45 days, cash flow is significantly decreased. In 45 days a company can have three payroll cycles, an entire cycle of bills due, and entire new cycle of bills in the mail. Timing is everything and once you become off synch with the schedule of the bills due, it is hard to get back on track.
Collections – Services billed are only as good as when they are collected. Keeping track of what your customers owe you is paramount in planning your cash flow. Unfortunately knowing is only half the battle, in most cases it takes action to collect. Action does not have to be brute force or nasty phone calls; it just needs to be common communication. Communication can start with account statements sent out monthly to delinquent customers, followed by a phone call seven to ten days later. If it is a large amount owed, maybe a payment plan can be derived to chip away at the account or pin down the client to their best estimate of when it might be paid. Sometimes these methods don’t always produce immediate results, but are rather effective in managing your accounts receivable in the long term.
Deposits – Money deposited is only as good as how it is used. There must be a rhyme and reason to the checks that get cut. Owners need to be aware of the cash requirements for the next payroll, payroll taxes due, and vendors that need payment. When cash flow is tight, fulfill your employer obligations and debt payments first, and communicate with your vendors if there is a shortfall.
In closing, proper accounting cannot make an economic downturn go away or your clients pay any quicker, but it can equip you will the tools it take to stay ahead of the cash flow anxieties. Diving into the details of your business benefits your knowledge to stay a couple steps ahead of the game.
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