No matter how great your startup idea is, you’ll need steady cash flow to get off the ground.
Cash flow is a key component of any business. Making sales and delivering your products or services to customers is great, but it doesn’t amount to much if the money never arrives. Maintaining a steady flow of cash to your business is like maintaining a steady flow of blood throughout your body—it’s necessary to continue operating.
It is common for small businesses to have cash flow problems for a variety of reasons. Many customers will see a bill from a small business as less of a priority than a bills that is due to a large corporation, so you may get pushed to the bottom of the payables list. However, if you are going to keep your business going strong for years to come, you need to get past this hurdle. You won’t stay in business for long without a strong cash flow, so review the steps I’ve learned from running my own small business to improve in this area.
- Get invoices out on time. Your customers can’t pay you if you never send them a bill. You might be surprised to learn how many businesses have cash flow problems simply because their invoices aren’t sent out in a timely manner. You should have an established protocol to send invoices (such as on the first of the month), and they should go out on the set day without fail. Sending invoices out even a few days late can have a major effect on your cash flow for that month.
- Be proactive. It is important to give your customers a standard period of time —30 days is common—in which to pay their bill. During this time, you obviously won’t be taking any action to collect the payment. However, once the date has passed without payment, you should be proactive to collect the money owed. Often all it will take is a simple phone call to get one of your customers to send over a check. These phone calls shouldn’t be hostile or accusatory. Just call the accounting office and ask for an update on the payment status. Hopefully this will get the ball rolling and the money will be on its way.
- Be flexible. As a business owner, consider the challenges that other business owners face on a daily basis. When you send out invoices, you should expect that at least a few customers will have cash flow problems of their own, so they may not be able to pay you on time. When this happens, be willing to accept partial payments in order to bring in at least part of the money you’re owed.
- Offer cash discounts. Offering your customers a discount for paying quickly is a great way to keep money flowing—especially early in the month when the payments may otherwise be slow to come in. Even a small discount off of the total invoice amount will motivate the companies with cash to send their payment ahead of the deadline.
- Review purchasing practices. There are two sides to cash flow: the money coming in and the money going out. While it is great to collect money as quickly as possible, you will also benefit from reviewing the way in which you spend money. Do you buy supplies before you need them? Do you make payments in advance without receiving a discount? Solving your cash flow issues may be as easy as optimizing the way you spend money.
Tracking your cash flow and making key improvements are only possible when you have a clear picture of your whole financial situation.
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
Image Credit: CC by David Goehring
