We all like to see cash flowing into our business. As well as telling us that our customers like our goods and services well enough to pay for them, it also means that we will have some money to pay our bills and, if we are lucky, some cash left over for us to spend on things we enjoy. It is this inflow of cash that allows us to continue to operate our businesses.
Cash flow is not an accidental by-product of running your own business. You must take steps to make sure that cash continues to flow into the business. You must also control the cash that flows out. When and if cash stops flowing into your business, you must arrange cash infusions if your business is to continue.
Manage Your Cash
Cash flow is one of the many aspects of your business that you must learn to manage. Effective management allows you to anticipate cash shortages and, ideally, take steps to prevent them. If you do not effectively manage your cash flow, you will face the challenge of coming up with money to keep the phone company from disconnecting
Building Block
Monthly statements of revenue and expenses will help identify peaks and valleys of your revenue and expenses. In preparing cash flow forecasts for your second and subsequent years, use the actual results from your first year as a model.
To estimate income and expenses, consider individual items for the same month in the preceding year. Is the amount likely to be the same, higher, or lower than it was during the first year? By repeating the same process every year, you will be well prepared to manage your cash flow on an ongoing basis.
your telephone service. In various business ventures, I have experienced the satisfaction of heading off cash shortages and have also had to scramble for money to meet payroll obligations. Believe me when I say that scrambling to meet financial obligations is one of the most frustrating and demoralizing aspects of running a business. Do whatever it takes to prevent that situation from arising. The best prevention starts with forecasting your cash flow. This allows you to manage it and prevent cash crises.Chapter 9 introduced the concept of a cash flow forecast as part of starting your own business. Preparing this statement is an exercise in crystal-ball gazing. Because you do not have any actual results on which to base your forecast, your projections are little more than educated guesses. Don’t let this discourage you from preparing an annual cash flow forecast. You can always revise it as you begin to see actual results from your operations.
Managing Cash Inflow
Obviously, before agreeing to sell anything to any customer, it is critical to satisfy yourself that the customer can and probably will pay you. The best approach is to try to prevent situations that might result in the development of delinquent accounts. In other words, try to avoid situations in which you either will not be paid or, if paid, will be paid late.
Credit Granting and Billing Policies
| Item | Explanation |
| Credit | When you grant credit, you are in effect allowing someone to use |
| application | your money. Use as much care in granting credit as institutional lenders |
| do. Develop your own credit application based on what the banks do. | |
| Use the information on the application to decide if you are prepared | |
| to lend your money to this customer. Are you likely to be paid? | |
| Credit bureau | Credit bureaus collect and report information about the credit |
| report | histories of individuals and organizations. Before agreeing to grant |
| a large amount of credit, check with your local credit bureau to | |
| determine if the customer is credit worthy. Check with your banker | |
| to locate a credit bureau you can join. | |
| Negotiable | Arrange payment terms that your customers are likely to be able |
| terms | to honour. There is nothing to be gained from rigid terms if your |
| customer can’t meet them. | |
| Deposit | If you are performing services that will be spread over a period of |
| time, ask for a deposit of 10 per cent in advance. If a customer | |
| cannot pay 10 per cent of your bill, how can it pay 100 per cent? | |
| Installment | Bill monthly or at significant stages of your work. If a customer |
| billing | cannot pay the installments, you can cut your losses before they |
| become too large. | |
| User-friendly | The easier it is for a customer to understand your invoice, the |
| invoice | sooner it will be paid. Be sure to include an invoice number. As |
| well as complying with Canada Customs and Revenue Agency | |
| standards, this will make it easier for you to track your invoice | |
| when dealing with your customer. | |
| Duplicate copies | This allows your customer to keep a copy and to send a copy |
| of invoice | with its remittance. This can expedite the payment of your account. |
| Penalty for late | Sometimes this stick encourages prompt payment. |
| payment | |
| Discount for | And sometimes this carrot also encourages prompt payment. |
| early payment |
Hot Tip
Unless you make other arrangements with your customers, make all of your accounts payable on receipt.
If the account has not been paid within 30 days, make a follow-up telephone call as soon as you can after 30 days.
One of the best ways of minimizing problems with delinquent accounts for services rendered is to adopt the practice of requiring a partial payment in advance, and then the balance payable by installments as the work proceeds. Following this approach, you would request 10 per cent of the anticipated total fee before starting to work for a customer. If the customer cannot or will not pay this deposit or advance, it could be an omen that you might have trouble collecting the rest of your bill.
This preventative action starts with developing and following policies regarding granting credit in the first place and then billing and collecting accounts. Make sure that these policies are in place before you send your first bill to your first customer. The table below outlines some factors to consider in developing your credit granting and billing policies.
When collecting accounts, remember that the older the account becomes, the more difficult it is to collect it. The first danger sign occurs when the account becomes 30 days old.
For large organizations, after 30 days call the accounts payable department and ask for a status report on your account and when you can expect to receive the cheque. Because you will be speaking with an employee who does not directly manage the funds, neither they nor you will be embarrassed by your call. Your call will also allow you to sort out any difficulties that might have arisen as the account works through your customer’s accounting system. If the account has gotten lost in the system, with the help of your customer’s accounts payable clerk, you can get things back on track.
When your customer is a small business, it is a good idea to call soon after you have sent the account to make sure that everything is in order. If there are any problems with your work or your goods, you can resolve the problems as a separate issue from trying to collect the account.
If the account is not paid as agreed, call your customer and check on the status of the account. This will help you gauge if your customer is experiencing a temporary cash flow problem, in which case you will have to work out some payment arrangements.
If you do not like making these calls, have someone else make them for you. Just because it’s your money, it doesn’t mean that you must put yourself through extra stress collecting what is owing to you. You can pay for this service by the hour or by results. Regardless of how you pay, if a third party collects your money for you and eliminates some stress from your life, it’s money well spent.
A good way to avoid nonpayment or late payment is to obtain a partial payment in advance. Then, with a portion of the fee paid in advance you bill a portion of the amount at regular intervals until you have finished delivering services. The intervals could be either when significant stages of the work have been completed, monthly, or in equal installments over specific periods of time. By following this approach, your exposure to possible bad accounts is limited. If your customer cannot or will not pay, you will know sooner rather than later. In order to cut your losses, you will simply stop doing work for customers once their accounts are overdue.
At some point, some of your customers will simply refuse to pay their accounts. You can simply write the accounts off or try to collect them through legal action. If you believe that you have a good case and that your customer has money available, you can start a court action to collect the money owning. In doing so, keep in mind that court actions are neither fast nor inexpensive. Further, you may succeed in getting a judgment against a defaulting customer and still not recover your money.
Once you have started a court action to collect money from a customer, you are not likely to do business with that particular customer again. If the customer is experiencing a temporary cash flow crunch, as many small businesses do, it might be better to work out some payment arrangement than to start a court action to try to collect the money.
Hot Tip
Before starting any court action, ask yourself how much good money (your working capital) you are prepared to throw after bad (the bad debt). Unless it is a very large amount of money that you are reasonably sure of collecting, you are usually better to swallow the loss and get on with running your business. Treat the bad debt as an expensive lesson and do whatever it takes to prevent a similar situation from happening in the future.
Managing Your Cash Outflows
Cash inflow, or revenue, is one side of managing your cash flow; obviously, cash outflow, or disbursements, is the other. The disbursement part of your cash flow forecast can serve as a budget for you. If you have made provision for normal expenses, try to keep your expenses below the amounts you have designated. This will allow you to control the cash flowing out of your business as part of your cash flow management.
Need More Money?
There are two basic ways of increasing revenue. The first approach is to provide more work to more customers. This will involve growing your business, as outlined in Part 3.
Entrepreneur Beware
For many businesses, the knee-jerk reaction to a reduction in cash flow is to cut spending. This invariably leads to a budget review in which each and every expense is carefully examined, with a view to significant reduction, if not total elimination, of the expense. Following the worldwide restructuring that took place in the early ’90s, virtually all large organizations slashed budgets and cut expenses. Realistically, though, cutting costs is only part of the cash management equation. The other part—in fact, the more signifi-cant part—is increasing revenue.
Do not increase your prices just because you need or want more money. Any increase in prices will inevitably result in some loss of business. Before raising prices, assess how much you are likely to lose as a result. Make sure that any price increases are more than sufficient to offset any losses that you will experience.
Building Block
Without a line of credit, you will have to use personal funds, or those of your family, to pay bills during cash crunches. Just treat the injections as temporary contributions to capital so that you can repay them when your cash flow permits. If you have the personal resources to cover cash shortages in your business, you can save the interest charged when using a line of credit.
The second approach is to increase what you charge customers for your goods and services. Perhaps you are charging less than the competition and, by simply raising your prices to what the competition charges, you can generate more money. Or maybe the quality of your goods or services has increased and you have not increased your prices to reflect this.Sooner or later, all businesses need cash transfusions. As in all aspects of business management, it is better to plan for this contingency before it arises.
As noted in Chapter 8, the best approach is to arrange for a line of credit with your bank. By applying for one before you need it, it is more likely to be approved. Essentially, a line of credit is like a limit on a credit card. As you need money you draw against the credit, and when you have money you repay the funds. No interest is charged unless and until funds are actually used.
Very often, cash flow problems indicate problems that cannot be removed by the infusion of more money. Perhaps the cash flow problem means that it’s time to look for a merger partner, as discussed in Chapter 24. Or maybe it’s time to plan to get out of business, in which case Chapter 28 will help. Regardless of whether you perceive cash flow problems to be temporary or more permanent, they should be taken seriously and managed properly. Your business simply cannot survive without cash flow.
The Least You Need to Know
Forecasting cash flow is just as important once your business is established as it is during the startup phase.
Managing cash flow includes making sure your customers pay you on a timely basis.
Although cutting costs is one way of dealing with a cash crunch, it is usually better to generate more revenue, either by providing more goods and services to more customers or by increasing what you charge your customers.
