Managing cash flow is probably the most important administrative task a business owner has,” says James Lochrie, co-founder and CPO of Toronto-based Wave Accounting. Having receivables arrive at the right time is the best way to ensure you can pay staff, contractors and suppliers on time—which is key to keeping your business running smoothly.
But for many small businesses, it can be tricky to keep the cash flowing. Lochrie offers some tips to improve receivables for better cash flow management.
“Where businesses tend to get in trouble is revenue management,” says Lochrie, who has worked in the accounting industry for more than two decades. They understand that $5,000 of costs on a $10,000 project means a healthy profit, but often forget suppliers will be knocking on their door for payment long before the ten grand appears in their bank account.
Ideally, you’ll have a buffer in your bank account to cover these advance costs. But recognizing the cash gap is key to managing it well.
“Having a good sense of your cash flow is the most important thing,” Lochrie says. For solo entrepreneurs with uncomplicated financial situations, that might be a back-of-the-napkin calculation. But for businesses with more balls to juggle—receivables outstanding, bills coming due, employee salaries and overhead costs, for example—a good bookkeeping system is essential.
One option, of course, is to outsource the problem and hire a professional bookkeeper to stay on top of the numbers and keep you in the loop on what’s important. Instead—or in addition—web-based software programs might be the way to go. Among the features of these systems is electronic invoicing, which lets you track when clients have logged in to view their invoices—and how quickly they typically pay them—as well as giving you the option to automate payment reminders, late payment fees and recurring invoices.
Another key aspect of being well organized? Sending accurate invoices on time. This might mean as soon as a project is finished, or, in some cases, it might mean requesting a deposit from a client at the beginning of work to get cash flow going early on.
Accepting multiple methods of payment is another way to accelerate receivables. For instance, says Lochrie, it’s important to consider whether you’ll accept credit card payments, which for some clients might mean the difference between a prompt payment and a tardy one.
Another strategy that works for some business owners is the carrot system: offering a small discount to those who pay bills promptly. Getting that cash in the bank earlier might be worth a small decrease in revenue.
“Poor cash management practices is probably the number-one reason why good businesses fail,” says Lochrie. And while it’s understandable for entrepreneurs not to be naturally good at tracking their finances, it’s imperative that they at least learn the basics—and hire someone who can manage cash flow properly. Adds Lochrie: “It’s about developing a discipline around cash management and basic accounting principles.”
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