One of the aspects of your business that has the biggest affect on your financial health is your cash flow. Having an awareness of how to manage the money moving in and out of your accounts can make all the difference in the success of your business. We recommend small businesses looking to improve their cash flow should start with these simple but effective steps:
- Get clear on money coming in and out. One way to do this is by connecting all the apps you use for payroll, expenses, and generating revenue to a central system that gives you a snapshot of money movement. If you use cash to pay certain expenses, make sure you use expense-tracking software to record these cash transactions.
- Do a cash flow review every month. Whether you’re a solo practitioner or a small business with co-owners and a few employees, you can evaluate what new expenses or revenues are likely to come up in the month ahead and address potential cash flow constraints before they become emergencies.
- Set payment terms that work for your business. Common payment terms in many industries are net 30-day payments. The downside of net 30 for small businesses that invoice at the end of the month is that, in the event that payment is a day late, it can affect the small business owner’s ability to pay monthly rent, payroll, or other expenses on time. When negotiating payment terms, consider asking for net-15 or net-20 payments to ensure you’ll still get paid monthly even if payment runs a day or two late.
- Encourage digital payment options as opposed to mailing checks. Waiting for a physical check to be cut, mailed, and deposited into your bank can take days to weeks. Even if some of the digital methods come with small processing fees, the benefit of receiving payments faster could outweigh the roughly 2%-3% you might have to pay for processing.
- Automate follow-ups and build in late fees. As your small business grows to tens or hundreds, have a system in place for following up on late payments. On a related note, build late fees into your contract. Late payments can significantly harm small businesses. If a payment is more than 2-4 weeks late, you could consider adding a 5%-10% charge.
Taking steps to optimize your business’ cash flow can set you up for success in 2023 and beyond. If you would like to learn more about how we can help you have a financially successful year, schedule a call today.