Today’s post discusses the final deadly mistake you can make with your small business: Mismanaging your cash reserves and cash flow.
Even when business is good you can risk being short of cash. Growth is expensive! However, you also need to be prepared for times when sales slow or customers delay payments. Managing your cash reserves and flow is necessary for a healthy, growing business.
Let’s examine techniques you can use to manage your cash successfully.
Ensure that customers pay you promptly
Maintain a cash reserve for bad debts and growth
Negotiate with suppliers for more favorable costs or rates
Establish a business line of credit with your local bank
Ensure Your Customers Pay Promptly
It’s important that you take several proactive steps to encourage prompt payments from your customers.
Create a production and review process so that all of your customers receive accurate and timely invoices.
Understand your customers’ general business and payment cycles so that you can anticipate difficulties.
Know who is responsible for your customer’s payment processing. Make certain that you have the individual’s name, phone number, and email address.
Develop an escalation process for those (hopefully rare) times when a customer becomes a “late payer”.
Ensure that you know the current “health” of all your customer accounts.
Maintain a Cash Reserve
There is a saying that many financial advisors use, “Pay yourself first.” This advice is especially necessary for your small business. Establish a process that allows you regularly to fund an account for bad debts and growth. You won’t ever regret creating this account because eventually a customer won’t pay you for the goods or services that you delivered. If you have a bad debt reserve, you and your business will be able to recover much more easily.
Negotiate with Your Suppliers
Your suppliers can be a source of cost savings when you negotiate with them for better rates or reduced costs. Your small business can use similar negotiation techniques ¾ auctions, pre-approved status, bulk purchasing, and so forth ¾ that larger businesses use with their suppliers.
Business Line of Credit
A line of credit is yet another means you can use to protect your cash flow. Further, you can use the same principle for obtaining a business line of credit as you would when applying for a personal loan. Submit a line of credit application for your business when you don’t need it.
Make certain that your personal credit is in good standing and your credit scores both personal and business are within a range acceptable to the financial institutions where you’re applying.
You can make use of one or all these techniques to protect your business’s cash flow and prepare for growth, as well as the inevitable ups and downs of economic cycles. Effective cash management is as necessary to your business and its growth as are customers. Make certain that you management your cash and cash flow well.
If you want to discuss any of the ideas presented here or want assistance with implementing the business scaling framework, reach out and let’s have a conversation.
Next week I’ll talk about building an effective framework for landing significant customers. Until then, . . .
Here’s to balance!