The Importance Of Managing Cash Flow In Your Business

Posted on 31st Aug 2020

Article by: Melissa Houston

Have you ever found your business was short on cash and you were struggling to meet your financial obligations? You have money coming in but it goes out the door just as quickly.

Cash shortages can be a sign of trouble within your business. Cash is the lifeline of the business, and to be short on cash keeps you from meeting your financial obligations. If you can’t meet your financial obligations, the business could be shutting its’ doors. Cash shortage is one reason why 82% of businesses fail.

Being short on cash is a very stressful and unpleasant place to be. There are many benefits to effective cash management which include less stress, confidence in knowing that you will be able to meet your financial obligations, and an understanding of when payments from clients will be arriving in your bank account. Having a cash management system in place minimizes risk against your business.

Ensuring the prompt collection of client payments helps reduce the risk of cash shortages.

Recommended tips for effective cash collection:
1. Point of sale payment
To get payments in the door quickly, the best way to do that is to ask for payment upfront. Point of sale payments requires the client pay prior to working with them. This is the best way to ensure timely payment.

2. Prompt invoicing
If the point of sale payment is not an option, then the best alternative is to invoice on the day that the contract is signed. This ensures that your invoicing terms have started immediately and there should be no delay in payment.

For example, if you have payment terms of 14 days, the 14 starts on the date of invoicing.

3. Timely reminders of late payment
Run your aged accounts receivable reports weekly and ensure prompt follow up with those clients who have fallen under outstanding payments. If there are discrepancies you can catch the issue earlier rather than later and it is easier to resolve the issue.

4. Offer discounts for quick payment
When you are looking for timely payments, it is a good idea to offer a small discount to those who pay early, so it gives them an incentive to pay early.

For example, you can offer a small discount of 2% if the invoice is paid within 7 days of issuance.

5. Emergency cash balance
If you can save some cash for an emergency fund, it is suggested that you keep it aside for emergency cash shortages. An alternative is to have a revolving line of credit where you can dip into when experiencing cash shortages.

The bottom line is cash management is a vital part of your business. If you want to stay competitive you will need to implement a cash management system to ensure you will have the cash to pay your bills. An effective cash management system will itemize your expected cash receipts and bill payments by the due date and track your cash balance. It will alert you when your cash balance is low.