Tips For Solving Business Cash Flow Issues | Peterson CPA Firm P.C.

Tips For Solving Business Cash Flow Issues

Cash flow is one of the most common problems that all businesses face. It’s also one of the most crippling financial situations that business owners contend with. There are several steps you can take to reduce or eliminate your business cash flow issues. One or more of the following ideas will likely help your situation.

Invoice Immediately

Delays in invoicing cost businesses thousands of dollars every year. The biggest mistake that many in-house accounts receivables departments make is invoicing on a schedule. Some businesses are so busy that they may only send out invoices one a month. This is a huge obstacle to healthy cash flow. While other business transactions lend themselves best to schedules, your business should never make a practice of invoicing on a schedule. This ends up creating all kinds of cash flow issues. For example, what if you invoice every Tuesday and you render service to your highest paying client on Wednesday. Now you have to wait an entire seven days before you invoice for your largest future receivable? That adds seven days to the time they have to pay you, which doesn’t help your cash flow. As soon as you possibly can, send out your invoices for services or products rendered. Invoice immediately; ideally the same day that the service or product was delivered. Do this with all your clients and your cash flow problems should begin to disappear.

Make Payment Terms Shorter

One reason that you may have cash flow problems is that you’ve been too generous with payment terms. This is often the case with newer businesses that are eager to sign clients. Unseasoned business owners may not realize the impact that generous terms will have on their cash flow. Now that you do see the ramifications, it’s time to take a closer look at how long you’re giving your clients to pay invoices. For small business clients, your payment terms should be shorter; two weeks would be great, but 20-30 days is the norm. Larger companies often request a minimum of 45 days to pay, with 60 days being the norm. If you have a large corporation for a client or a government client, they may even insist on 90 days. It’s ironic that the larger the client—and presumably the larger their bank account—the longer they want to pay. In some cases, you do have to play by their rules, especially if it’s a corporation with blanket terms across all their vendors. It’s the price of doing business with them. But for small and medium sized business, you can definitely call the shots. Speak to the representative and tell them of your plan to reduce the payment due term. Then put the change in writing so their A/P department sees it. Finally, follow up to ensure that the shorter payment term is being adhered to. This small change in your invoicing practice will help to improve cash flow for your business.

Get on Retainer

One of the fastest and most effective ways to improve cash flow is to get on retainer with one or more of your clients. Retainer terms means that you’ll be paid the same amount on a regular basis. It’s income that you can count on when planning your budget. Most businesses that work on retainer rarely, if ever, have cash flow problems. If you have a business model that you don’t think would work on a retainer basis, consider this option: Ask one of your clients that routinely pays late if they’d be interested in paying in weekly installments toward their future invoices. This way, they aren’t hit with a large bill that they obviously have trouble paying, and you get the same kind of regular income that you’d get if you were on retainer. This way you are also helping to ensure that your invoices with this problematic client do get paid, albeit little by little.

Offer Multiple Payment Options

Another challenge for some of your clients might be the limited options you’re giving them to pay. If a client is cash poor, they may pay your invoices late, which gives you cash flow problems, too. You can help solve both of your problems by offering multiple payment options. For instance, you could offer payment by check, wire transfer or credit card. If you decide to offer payment by credit card, be sure to charge the client the extra 3% or so that the credit card processor will charge you. To implement this idea, print the new payment terms on the invoice itself, but also send out a separate letter or email to the client and to their A/P department so they’re aware of the additional payment options.

Don’t Procrastinate on Collections

The minute an invoice becomes overdue, don’t just “make a note of it” on your aging receivables report. Either you or someone in your bookkeeping department should contact the client and politely ask if the payment is on the way. Always be polite and understanding. Don’t alienate clients over collections. A late paying client is better than no client. Keep a friendly rapport so that the client will remain open and honest with you about any financial difficulties they’re having that are causing the late payment. Finally, be clear about collections laws. Collections regulations are very precise, and you always want to make sure you’re in compliance. If you aren’t comfortable making collection calls, you can outsource this type of thing to certain HR companies.

Cash flow problems can bring your business operations to a screeching halt. But these tips can help you keep money moving along the pipeline as it should. If you aren’t sure whether your company is facing cash flow problems, or which solution outlined above would work best for your business, consult with your CPA for insight.

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Posted on January 5, 2020