Small Businesses And Cash Flow Management

Every business, no matter if it's Microsoft or the little bakery at the end of your street, needs to manage its cash flow properly in order to survive. A businesses cash flow is the balance between the money that the business receives and the money it has to pay out. What many people fail to realize is that poor cash flow can destroy a perfectly healthy business in a very short amount of time. When we hear the term "poor cash flow" we are usually very quick to associate it with a failing company. But poor cash flows frequently occur in high-growth companies where sales figures are steeply rising as well.

Let's take a look at an example. A small company's manufacturing costs for a certain product are $200,000 and it has finally found a buyer for the product that is willing to shell out $1,000,000. At first glance, this seems to call for popping champagne bottles and many pats on the back. However, what happens if the manufacturing costs are due in January but the customer will only pay for the product in May? The small business will not be able to cover its manufacturing costs and could go out of business while waiting for the customer to pay.

Small businesses are more vulnerable to cash flow problems than larger companies because they either have very little excess cash or none at all. Therefore, properly managing your cash flows should be a top priority if your business is small. Ultimately, it can make or break your business. There are several ways that a small business can ensure that its cash flows are well-managed. Here is some useful advice to help you along:

Speedy Collections

In the process of customer billing, you should do everything possible to ensure that the bills are paid as quickly as possible. If you're not already doing this, find a way to allow your customers to place their orders online or via fax. This will help make the collection process faster. Also, don't wait to send out your invoices. Send them out as soon as you ship the goods. Always make sure that the invoice clearly states what the due date is and how much the penalizing interest is in case of a late payment.

Strict Accounts Receivable Policy

To ensure a healthy cash flow, you must adhere to strict accounts receivable practices at all times. Make sure your customers have a good credit history before you give them credit. It's always a good idea to use rating agencies or ask for references. If a payment is late, follow up with a letter and a phone call immediately on the due date. When that does not help, seek help from your lawyer or solicit the services of a collection agency. And remember, never send out additional merchandise to a customer who still has payments open with you.

Minimal Balances in your Checking Account

There is no need to maintain high checking account balance. Your extra cash can be put to better use elsewhere. For example, it can be used to repay portions of a loan or invested in a secure financial instrument that provides higher returns. You simply need to find out how much money you need to have in your bank account as 'cash reserves' to cover the day to day costs of running your business.

Remember cash flow is a businesses lifeblood, if it runs out it's dead!

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Aaron Parsons from http://www.TheBusinessCommandos.com is an International award winning optimization expert, in demand speaker, author and entrepreneur coach that has coached entrepreneurs to profit growth exceeding 500% in as little as 5 months using his powerful Business Success Model.

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