Ask the Consultant: How to manage your cash flow

  • Updated: November 17, 2013 - 2:03 PM

Question

With a slowed economy, the matters of cash flow are paramount to the health of any small business.

Is there any advice you could give to a small business when dealing with cash-flow issues? More to the point, maybe you could discuss techniques to help businesses get clients to pay on time and often.

For a small Web design and app development firm of five and less employees, cash flow is at times challenging.

Simon Urbina, Chief Creative Officer, Simon Web Design, @SimonWebDesign, SimonWebDesign.com

 

Answer

The main tool for managing cash flow is a cash budget. Use a spreadsheet to calculate your future cash position. Forecast revenue and expenses and determine the appropriate timing of the related cash flows. Include non-expense items, for example, fixed asset purchases.

Accounts receivable management is critical. First, consider whether and how to offer credit terms. Research your industry and competition to be certain that you are offering similar terms and not putting yourself at a disadvantage.

Assuming you must offer credit, consider the following to enhance collections.

• Make sure to bill completed jobs immediately.

• If possible, include progress billings in your contracts.

• Understand your clients and consider invoicing each based on their payment processing procedures. If a client’s payment must be approved at a monthly board meeting, determine how far in advance the invoice must be received.

• Invoice electronically rather then by U.S. mail.

• Make your payment terms clear on your invoices. Include due date, acceptable methods of payment, and penalties for late payment.

• Consider offering discounts for early payment.

• Once an invoice goes beyond the scheduled due date, send a reminder to the client.

Customer service is key to the timely collection of receivables. Satisfied customers are likely to pay on a timely basis as a matter of developing a sound business relationship.

About the author: Richard S. Sathe, professor and chairman, Department of Accounting, Opus College of Business

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