We’re sharing a quote for thought, that “Turnover is vanity. Profit is sanity. Cash is reality.”
The last notion, cash is reality, is why credit control is important. This is especially relevant if you are a small business owner because cash is crucial to the growth of your company and day-to-day operations.
Why is managing cash flow important?
First things first, what is cash flow? Its comes down to inflow versus outflow. Cash flow refers to the money that comes into your business and the money that goes out. To give you prospective, think about cash flow in terms of:
- Positive: your company is in a good place; liquid assets are increasing so you’re able to settle any debts and reinvest in your business, as well as plan financially and have peace of mind
- Negative: your company is in a negative state; liquid assets are decreasing and you’re unable to settle debts to reinvest in your business
The point is, if your business is settling debts before you bring in payments, this could mean you’re heading for cash flow difficulties—if you’re not there already.
To maintain successful cash flows, you need to understand the relationship between the timing of cash that’s going out in relation to your expectations of your incoming cash. The most important step is to do a cash flow projection. This means, managing cash flow by starting with an honest and objective evaluation. This means, calculating an accurate estimate of the costs to run your business in relation to your sales projection. When planning, check your profitability and make sur your business is earning a reasonable profit.
Think about when you buy goods, materials and when you pay staff, and then compare it to when you’re asking your customers to pay for your services and products. Having a good cash flow means you’re able to generate and use cash.
Once you’ve established a solid plan to manage cash flow, make sure you have all the basic parts of your sales process in place.
Ask yourself the following questions. Are you sending invoices? How soon after orders do you send them? Are you sending the invoice to the right mailing address? Are you addressing the invoice to the right person? Do you state your payment terms, such as “payment due in 15 days” on the invoice? Are your bank details on the invoice?
With proper invoicing, you should be diligent with sending out your invoices quickly, specify payment options, and emphasize to slow payers that interest will be charged to overdue invoices. Be as transparent as possible.
Part of working with vendors to allow your company to run as smoothly as possible, is to find partners that are respectful of your business needs. Build a good relationship with the people you want to work with. The people you do business with will usually accept a timely and complete invoice without argument and payment will follow.
Some of your customers will have extra layers of complexity in their orders and invoices, such as, with purchase orders. A purchase order is a legally binding document between a buyer and a supplier to communicate an agreement to purchase items at a certain price. This document includes elements like quantity, item number, product description, and pricing.
Always check when receiving an order whether the buyer needs a purchase order number. Most importantly, make sure you’re working backwards to ensure that these costs are calculated in relation to your cash flow. How much are you spending? When is the payment due? These considerations will impact your cash flow.
Don’t be afraid to ask your clients for payment when it’s due. This may be uncomfortable, especially if you’ve provided goods and services in advance of payment. However, some clients might just need a gentle reminder. In fact, larger businesses appreciate these check-ins, and this might be a good opportunity to increase your sales. Just make sure you’re not approaching these situations in a hostile manner and be strategic about it.
You can send an email as a reminder of any outstanding invoices before they are due. This will help you avoid delays when they’re payable and flush out any problems before they happen. Prepare and plan for these challenges, and ensure this is considered in the planning stage when evaluation where your business stands.
After that, make sure you demand what is rightfully yours. It’s far less embarrassing to ask for payment than it is to ask for extra credit when you can’t pay your suppliers.
If you find that the majority of payments are late, you need to reevaluate your invoicing process and strategize on how to get paid quicker.
Sometimes, you need to take things further, which might mean using debt recovery agents and solicitors. But that’s for another blog.