“Negative cash flow as well as insufficient working capital are major reasons why more than half of small businesses don’t survive past their fifth year.”
Does your business have cash flow issues? You are not alone. Nowadays clients big and small are taking longer to pay as many companies are hoarding cash. Meanwhile, your business is suffering from a lack of operating capital. Sounds familiar? Negative cash flow as well as insufficient working capital are major reasons why more than half of small businesses don’t survive past their fifth year. However there are several things your business can do to fix cash flow problems:
1. Keep your books in order
Many business owners put bookkeeping tasks aside because they are too busy with the huge workload. Inconsistent invoicing and not keeping track of customer payments result in poor collections from the clients. The best way to get your business books in order is to use accounting software. You’ll be able to stay on top of how much each customer owes you.
2. Run a credit check
Unpaid bills and bad debt can be crippling for any business and can easily occur if a proper credit control system is not put in place. Check the prospective customer’s credit history before you extend credit to an individual customer or a company.
3. Manage your payment terms
If the payment terms you have set for your customers are out of sync with the payment terms set by your suppliers, negative cash flow can build up over time. The typical example is when your customers have 60 days to pay you but your suppliers want to be paid within 30 days. The best solution in this situation would be to renegotiate terms with your customers and/or suppliers.
4. Ask your customers for a deposit
Large orders or projects require your business to spend a substantial amount of cash upfront. That might lead to cash shortages. To avoid cash crunch have your clients to provide you with working capital by asking them for a security deposit. Be consistent and build the deposit policy into your business sales model.
5. Consider selling your accounts receivables
Factoring, selling your receivables at discount to a third party, can be used as alternative method of financing to improve your cash flow. Taking into consideration that nowadays it is almost impossible to get a business loan without providing a personal guarantee, factoring can provide your business with immediate access to working capital and it is relatively easy to setup.
Taking the steps described above, and developing solutions to keep cash flowing into your business, will make you successful.
Costa Shepin CPA, a regular contributor for WSBC Chicago weekend radio show, covering various tax related topics and answering audience questions.
