The importance of managing revenue is far easier to recognize in some types of businesses than it is in others, but skillful cash management is critically important in every business, from the smallest to the largest. Cash flow — how much money is flowing into and out of your business — is an easy concept to understand; however, not every security professional is aware of the impact that cash management has on the bottom-line.
Losing control of money can generate far more financial headaches than temporary red figures on the bottom line; on the other hand, a sensible cash management system can provide a comfortable cushion during those inevitable slow times when the phone isn't ringing as often as you would like. Here are nine powerful techniques that can help you to improve your cash flow and net income right now:
1. Never allow any of your money to lie idle
If you don’t already have one, open a money market account at your bank and ask to have it linked to your business checking account for telephone or online transfers. Deposit all of your daily receipts into the money market account where they will immediately start drawing interest — NEVER deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover checks written. The banks have made this technique so easy to use that there is no longer any reasonable excuse for not using it. While even money market interest is anemic now, interest rates are bound to climb and you will be set to benefit when they do.
2. Don’t be in a hurry to pay your bills
There's good reason why checks are slow to come in from people who owe you money — it is because hanging on to cash as long as possible keeps that money available to draw interest. That’s why it is important for you to set up a system to pay your bills just before they come due. It is easy to do and it moves you up another rung on the ladder of professional cash management. Don't jeopardize your credit standing by paying bills late. Pay your bills just before they are due. It is especially important to avoid late payment on credit card bills because of the oppressive penalties that most banks have put into place.
3. Be aggressive collecting accounts receivable
If you do any of your own billing, never allow those receivables to go untended — you earned that money; you have a right to it; you need it. Dunning late-paying customers may not be your favorite pastime, but setting up an accounts receivable file and following through on late payments is as important to your financial success as the quality and professionalism of the services and products you offer. If your customers learn that you are cavalier about money owed to you, you can be certain they will stretch your patience (and your cash flow) to the limit.
4. Diversify to keep cash flowing
This is an important strategy when business is off and revenue is down. During slack times, any income is better than no income. Consider offering special services or products during slow periods at sale prices that do not satisfy your usual parameters of profitability. That approach makes sense by providing work to help smooth out the inevitable and costly ups and downs of cash inflow.
5. Maintain a cash cushion
Try to keep enough cash in interest-bearing accounts to cover normal operating expenses for three to six months. There is nothing like the peace of mind and self-confidence that comes when you don't have to sweat out next month’s rent or next week's payroll during a business slowdown. Also, keep in mind that your cushion money is making money for you in those interest-bearing accounts.
6. Develop a personal relationship with your banker
Even if your business is relatively small, it is a good idea to develop a personal relationship with the manager of your local bank branch. Discuss your financial picture honestly and you will likely get some good ideas and a favorable ear should you ever need a little financial help.
7. Let your computer help you to manage cash flow
Whether you use of one of those heavyweight commercial software packages, or Quicken or Money on a desktop PC, trust every aspect of your business — including investments — to your computer. The financial reports and analyses that modern software can produce at the touch of a button can be vitally important management tools for improving cash flow and bottom-line profits.
8. Consider leasing
Most financial advisors agree that leasing products like cars or vans for personal use is usually not financially advantageous; but business is an entirely different animal. “The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investment,” says accountant Jay Blumenthal of Abington, Pa. “It usually makes sense to lease if you will be able to use the cash in your business or in your investments to earn a better return than the cost of leasing.”
Talk to your tax advisor about this the next time you’re considering any large capital purchase.
9. Spread the Gospel
To do a professional job of managing cash, you must have a steady flow of the stuff coming in. Many business owners keep themselves so busy dealing with day-to-day problems that they never get around to putting together an aggressive business-building marketing program — that's a serious mistake. Marketing is an essential ingredient in the recipe for growth — even survival — for any service business; yet, many owners shy away from all but the most obvious ways of promotion. For some, their entire marketing program consists of a Web site or an ad in the Yellow Pages. Building a growing and profitable business requires an ongoing marketing program — there is no other way. Competitive prices alone won’t do it; a high degree of professional skill alone won’t do it. As one entrepreneur puts it, “You have to tell the world your story. If you don’t do it, no one else will.”
William J. Lynott is a veteran freelance writer who specializes in business management as well as personal and business finance. For more information, please visit www.blynott.com.