Black Friday is Here!
Can't find what you're looking for? Shop all ink and toner cartridges by brand
Black Friday is Here!
While it's not the most glamorous part of running a business, cash–flow management is arguably one of the most important.
Of course, it's one thing to declare that cash flow is important, and another to attend to the details that will keep your business flush. The key is to know where to focus your energies. The following tips from Bob Cohen, Director of the Bethesda, Maryland–based C.P.A. firm the Lang Group, will help you manage your cash efficiently and intelligently.
Many companies fall into the trap of using money earmarked for salaries or payroll taxes to finance the growth of their business. "Tapping into payroll taxes is the most expensive financing imaginable," says Cohen, noting that if it leads to filing a late return you may pay tax penalties as high as 25 percent. Similarly, the short–term financing you may gain from delaying the payment of salaries will likely result in disgruntled employees who feel underappreciated. Treat the money you owe to employees and the government as untouchable and unspendable.
"When you get cash in your hand, resist the temptation to spend it," says Cohen. Avoid spending it on fancy cars, equipment, or clothes. Some entrepreneurs are too quick to reward their hard work, and relieve their stress, with new personal purchases — and, in some cases, to appear successful before they actually are. Use your cash to build the real, not the apparent, success of your business.
When you do spend your cash, be sure to do so carefully and according to a budget. Ideally, you should have a bi–monthly, monthly, and yearly cash budget. Once you've moved past business–survival mode, you should extend your cash budget to three or five years.
To save time and paperwork, Michael Odom, President of Phenix and Phenix Literary Publicists and a former financial consultant for small businesses of Phenix and Phenix recommends accounting software such as QuickBooks Pro. Unlike basic checking software, Odom points out that QuickBooks Pro will break down your budget and help you determine the ROI (return on investment) of the projects you're funding.
In many businesses, so much attention is paid to making the next sale that sometimes collections (accounts receivable) get short shrift. A sale is only good if you can collect 100 percent of what is owed to you. As you court new clients, ask yourself if they'll be able to pay you on time.
The sooner you bill your clients, the sooner you'll collect the money that's owed to you, says Cohen, who emphasizes that you should have a monthly or even weekly routine of billing. Remember that delinquent clients are often just as busy as you are and may simply forget to pay. Sometimes the best way to collect is to make a phone call.
Michael Odom agrees. "Don't let clients go into default mode," he warns. "The longer they go without paying, the less likely they'll pay you at all." If possible, Odom suggests setting up an automatic deduction payment system with your clients' banks (much like the ones individuals set up with their insurance or utility companies).
When do you know that you've waited too long for your accounts receivable? Cohen cautions to not let something go for more than sixty or ninety days.
This is potentially thorny territory. After all, how can you justify being a bulldog about collecting your accounts receivable if you're not always punctual with your accounts payable? The important thing is to know which vendors are flexible. Though most people want to be paid within thirty days, many vendors consider it acceptable to be paid within forty–five. "The key is to be consistent," cautions Cohen. "Don't pay in thirty days one month and sixty days the next."
Not all business owners are comfortable with this idea. If you have a strong need for cash–on–hand, however, it's a viable option. Just be sure to gauge which vendors will most likely be flexible about slightly overdue payments.
Fledgling businesses have continual needs for credit, explains Cohen, and for this reason should establish a good relationship with a bank. Instead of waiting for when money is tight – and your need for financing desperate — request a credit line when things are going well. You can then tap into this credit line whenever you need to.
This ties into the point about the primacy of cash and the importance of keeping a cash budget. Rather than leaving your cash in a non–interest–bearing account — or, for that matter, putting it under your mattress — figure out how much of your cash budget can be put into low–risk investments, such as savings accounts, CDs, or money markets.
Credit cards can be an effective source for short–term financing, especially because you can usually get low introductory rates for at least six months. The trick, says Cohen, is to "keep track of when these introductory rates are over. Then you can get a new credit card and roll the balance over into a low introductory rate."
Another way to prolong low interest rates is to call the credit card company and tell them that you're a loyal customer and would like to continue using their card at the same introductory rate for another six months. You'd be surprised how often this works. Similarly, if you happen to miss a payment and incur a late fee, you should call the company and request that they waive it. "Nine times out of ten," says Cohen, "they're going to waive the fee."
You should be careful, however, about using credit cards as primary or habitual sources of financing. On balance, you're better off seeking funding through a bank. (Read about how to land a business loan.)
Explore your financial planning options with a financial planner. They'll help you manage your cash flow with an eye to generating additional income, structure a retirement plan that can reduce your business and personal taxes, and establish a program that allows you to make more money from your business on a tax–advantaged basis.