A colleague told me about a long-time client and friend who passed away. The business went with him. It happens. That’s life. While his business made up about a third of hers, she weathered the loss of income because she had enough cash stashed away to cover her while she looked for new clients.

Another colleague texted me to let me know that her computer had died. Fortunately, she was able to buy a new computer the same day and restore her backed up files to the new computer.

Cash and profits don’t go hand in hand. Profit can show up on paper even if the company doesn’t have cash in the bank. Each time the company creates an invoice — an accounts receivable — it appears as profit on the company’s financial report regardless if the customer has paid. Thus, it’s possible for a profitable company to run out of cash.

Cash flow is the money that goes in and out of your business. Cash flow problems stem from the imbalance between the timing of the cash entering and exiting the business. When cash doesn’t come in fast enough to allow a small business to pay expenses and make payroll, it can fold.

What it takes to actually balance cash flow

Your greatest chance of ensuring you have cash at all times is to study the transactions and timing of money coming in and going out of your business. Seeing when cash moves in and out of your business and making adjustments will help you balance your cash flow.

Review your financial reports to figure out when your company has more cash and less cash in a single month. You may find patterns over the course of a few months.

Businesses get in trouble when they have too many expenses due at the same time while waiting for customers to pay their invoices.

Activities that affect cash flow:

• Late or no payments. (Accounts receivables.)
• Expenses: regular and unexpected.
• Charging too much or too little for products and services.
• Slow sales.

Three things you can’t do without cash:

• Grow your business.
• Stay in business.
• Compete.

14 Ways to get a handle on cash flow

You can better manage cash flow with these activities.

1. Check your accounts receivables

Check for the date you created the accounts receivables. Unless you have an agreement in place, you don’t want to wait more than a month for payment.

2. Update financial reports regularly

If you’re not comfortable or knowledgeable about accounting and financial reports, it’s a good idea to learn. An accountant can help you. If you don’t have one, hire one on an as-needed basis. Ask the accountant to create a cash flow statement for valuable insight regarding your company’s financial health.

3. Create invoices on time

Don’t wait days or weeks after you provide the product or service to send an invoice to your customers. In fact, provide the invoice with the product or hand the invoice to the client after you’ve delivered the service. Businesses that provide professional services will need to create an invoice before going on site or have a way to do it on site.

4. Add a payment due date on your invoices

Your customers have other bills to pay. Those bills may have a due date. If yours doesn’t, which business do you think the customer will pay first?

5. Require an advance deposit

This is common for those providing expensive products or services. Many businesses require paying half of the bill before the work and the rest after completing the work.

6. Identify accounts with late payments

Determine how you can encourage these clients to pay sooner. Arrange a payment plan or give them other payment options.

7. Accept partial payments

Better to get something now than wait longer with nothing on hand.

8. Include discounts and penalties

Motivate customers to pay faster by offering a discount for early payment and reduce late payments by charging a fee for overdue payment.

9. Review expenses

Can you cut costs? Here’s your chance to get creative. It never hurts to try negotiating for a better rate. If you’ve been a customer for a long time, the vendor might cut you a price break. You’d be surprised where you can find more cash for your business.

10. Deposit payments quickly

Don’t pile up the checks. Deposit them as they come in to keep cash flowing.

11. Save for a rainy day

Unexpected expenses will happen. Think about the times you had to call a plumber, electrician, or repair person. If earthquakes can occur on the East Coast and in Texas, unforeseen expenses will come up. And they tend to happen at the worst times.

12. Do a credit check on new clients

To avoid taking on a client who could potentially pay late, conduct a credit check. If you still want to take on a client with a bad track record, ask for a deposit up front or do one of the other suggested activities to increase your chances of getting paid.

13. Charge what clients are willing to pay

Setting fees is tough to do. Look at what competitors charge and how you differentiate your business from theirs. Research and experience will give you an idea of what to charge.

14. Seek financing

Getting funding can help restore cash flow balance. Banks aren’t the only place to go for working capital. Private lenders can offer other funding options such as microloans or invoice financing. The nice thing about invoice financing is that you don’t have a loan to pay back. The money is already yours.

Unexpected things happen. Doing these activities will make sure your business has ample cash flow available at all times.

What other ways can you improve cash flow management?

Image credit: Andy