Your Cash Flow Dynamics
With most small businesses,
cash is king. By that we mean that one of your most important tasks is
managing your cash flow to ensure there are funds available for meeting
your operating needs and funds available to enable you to take advantage
of opportunities for growth.
Optimizing your operating
cash flow really boils down to three basic rules:
- Get money you
are due as fast as possible.
- Pay money you
owe as late as possible.
- Earn as much as
you can on your cash balances.
Unless you are in
a retail business, most receipts for sales or services performed take
place some time after the sale actually occurs. A sale is made, goods
are shipped or services are performed, an invoice is presented and you
wait for payment. Here are three ideas for accelerating when you receive
- Identify a billable
event, other than delivery. It is common to have partial billings on
large jobs or when the job will take some protracted period of time.
Consider using some event or milestone as a trigger for an invoice.
It could be passing a design review, completing a critical test, or
receiving a large amount of material. If negotiated into the sale, these
events could authorize you to issue an invoice before the job is totally
- Set payment dates.
Your customers are trying to optimize their cash flow the same as you.
In the sales process, and certainly on the invoice, state when payment
is due. Whether it is the common "30 days" or with a "1%
discount for payment within 10 days", customers will be more likely
to respond to specified dates and terms. Sales to poor credits should
be COD. Once the payment date is established in your contract, you have
a legally enforceable document.
- Establish late
payment penalties. As Oscar Wilde said, "Nothing focuses the mind
like the sight of the gallows." Customers respond and your chances
of collecting interest from delinquent accounts improve with a stated
Holding on to your
money as long as possible also improves your operating cash flow and enables
you to earn interest on your funds.
- With major suppliers
it may be possible to negotiate a more flexible payment schedule. They
want your business and are often willing to respond with payment terms,
especially if the materials you are buying are being used over an extended
period. The time to approach the supplier is when placing the order.
They are more willing to consider this before they have your order in
- A second issue
to consider when you are the customer is some form of discount for prompt
payment. While the practice has become less common, some organizations
still offer a 1% or 2% discount if their invoices are paid within a
shorter period. A 1% discount for payment within 10 days equates to
a 36% annualized return on your money. If your cash flow allows it,
taking advantage of prompt payment discounts may be the best return
on your investment.
Finally, you should
make sure you are earning as much as you can on your excess cash balances.
- A few years ago
with the enactment of the Dodd-Frank Act, institutions were allowed
to start paying interest on corporate checking accounts for the first
time since 1933. Some institutions have taken advantage of this change
and now have business checking accounts that pay interest depending
on the level of balances and activity.
- Some banks offer
"sweep" arrangements that automatically more amounts in excess
of some minimum into an interest bearing account. Talk to your banker.
Cash and time are two of your most precious resources. Spending some time
setting accounts receivable policies, negotiating payment schedules with
vendors and finding the right account(s) for your cash will help you maximize