You’ve launched a business with a great idea and you’ve got customers lining up. What could possibly go wrong?
How about poor cash flow? It sinks more businesses than lagging sales or lack of profits.
The problem can be simply stated. If your business is like most businesses, there will be a gap (often a big one) between your due dates for paying expenses and the time your slow-pay customers get around to paying you.
The good news is that there are ways to deal with this:
- Borrow from a lender, typically by obtaining a line of credit.
- Develop a program to manage cash flow better.
Let’s take a closer look at each of these methods.
A line of credit from bank is a common tool for making it through the cash flow cycle. It allows you to borrow up to a predetermined amount without having to re-apply every time you need cash. This is short-term financing, typically repaid within a year’s time.
Improve Your Cash Flow Management
The idea here is to shorten the cash flow cycle. Here are some methods worth considering:
- Track receivables to identify past-due accounts and how late the payments are. Negotiate with customers to speed things up.
- Consider offering prompt payment discounts – for example, offering a 2 percent discount if payment is made in 10 days rather than the typical 30.
- Negotiate with your vendors and suppliers to extend your payment schedules.
- Set up your accounting system so that the invoice is paid on precisely on Day 30.
- Implement “just-in-time” inventory management practices to reduce storage costs.
- Talk to your banker about cash management tools – lockbox, remote deposit capture, Automated Clearing House (ACH) – that help you process receipts faster and speed up collections and deposits.
One nice thing about cash flow management techniques is that they can complement your financing choices. Used in conjunction with a line of credit, for instance, they can cut costs by reducing the amount that needs to be borrowed, or by making it possible to repay more quickly.