Archive for the ‘cash flow’ category

7 Tips for Getting Paid

May 17th, 2013

Not getting paid by clients or customers is one of the most frustrating aspects of running a small business. But when not getting paid impacts your small business’s cash flow, it’s one of the most dangerous, too. What small business owner hasn’t worried about getting paid at some point? Whether it’s the number of customers that are running past due accounts, or the client who seems to be reluctant to pay for completed work, having proactive policies in place that anticipate these eventualities is your best defense.

Here are seven ways to make sure you get paid for the goods and services you sell.

1. Don’t extend credit automatically to new customers/clients.
Small businesses, just like large businesses, need to have credit policies in place that provide guidelines for determining which customers or clients will be extended credit and on what terms.

It may be your business’s policy, for instance, to never accept personal checks as payment, only company checks, debit cards, credit cards or cash.

If you are considering extending credit beyond that point to individual clients or customers, you should have a procedure set up where the customer or client has to fill out a credit application and/or do a customer credit check. The fee for a credit report can seem expensive depending upon how detailed the report is, but it’s definitely money well spent if it prevents you from not getting paid for that big sale.

2. Take partial payment in advance.
If it’s sensible in terms of the price of the goods or services, ask for a deposit or retainer up front. This is an increasingly common business practice for higher-ticket items and services; no reasonable customer should be offended by such a request.

For instance, if you provide services, you might charge a percentage of the projected bill or a set amount as a retainer before you start work on a project with the remainder due on completion of the task. Or break the bill into thirds, asking for a third before work starts, a third halfway through the project and a third upon completion.

The beauty of partial payment is that it ensures that you get paid something even if the customer or client defaults on the rest of the bill.

3. Invoice promptly.
This seems like a no-brainer but many businesses are slow to invoice their clients. And by establishing the degree of urgency with their own example, why should anyone be in any hurry to pay them?

Customer/client invoices should be prepared and presented immediately upon delivery of the goods or services, or as soon as reasonably possible. Not doing so can make your business look indifferent to getting paid and slow down your cash flow for no reason. Waiting to prepare your invoices at the end of the month, for example, you may be adding as many as thirty extra days to your cash flow conversion period. QuickBooks software and Point of Sale systems make quick invoicing easy.

4. State payment terms visibly and clearly.
If you want to get paid promptly, don’t leave it up to the customer or client to decide when your invoice should be paid. Rather than giving them invoices that say vague things such as “Payable upon receipt”, make sure your invoices state specific payment terms, such as “Payable within 30 days” or “Due Date: ____________”. Your invoices should encourage prompt action on the part of your customer.

5. Reward customers for paying promptly.
Offering customers a discount for paying their invoices early, can help you get paid more quickly. For instance, if the usual policy is to have payments due in 30 days, offer a small discount such as two percent to customers who pay within 10 days.

6. Establish a follow up procedure for customers who miss payments.
Even if you’ve never had a collection problem to date, you should still have a system in place for flagging late payments, and a procedure for contacting the customer or client when the payment is late. The more quickly you follow up on a missed payment, the better your chance of getting paid.

Typically, such a procedure starts with a letter that simply states the bill is overdue and requesting the customer’s immediate attention to the matter. Nowadays there are many channels that you can use to contact the customer. Some are more effective than others. If time allows, I recommend starting out with a phone call to “touch base” with the customer or client. You want to come across as friendly and polite, not threatening in any way. Sometimes the person has just forgotten or missed seeing a bill and a quick phone call is all it takes, meaning you get paid and you don’t have to go through any of the rest of the collections procedure.

Sending collection letters via email is nice because it automatically creates a copy of the collection letter for your files, and automatically date stamps your message. However, because of email filtering and email overload, it may not be a very effective way of getting your collection letters to customers and clients. You’ll want to send them in other ways, too, such as regular mail, fax or even courier, depending upon the size and importance of the debt.

7. Turn the overdue account over to a collection agency.
Collection agencies collect debts for a fee or percentage of the total amount owed. This fee is based on how old the debts are (the fresher the better) and how much business a creditor has to offer. Expect the rate for collecting consumer accounts to be higher than for business-to-business accounts. Collection agencies have experience with, and knowledge about debt collection that you, as an individual business owner, don’t have and hiring one can be well worth it, if the amount of outstanding accounts receivable warrants it.

Proactive Policies Are the Best Way to Get Paid

As you can see, the best ways to ensure you get paid for the products you sell and the services you provide is to have proactive policies and procedures in place to cut down on the number of delinquent accounts receivable your small business has to deal with.

Things such as having credit policies in place, performing credit checks, having a partial payment policy and being clear and upfront about your payment expectations, both in person and on your invoices will go a long ways towards ensuring that you get paid, and your small business doesn’t get stuck with a lot of bad debt.

5 Tips for Cash Flow Management

December 18th, 2012

Cash flow is the lifeblood of any business, and in any business there are cash flow dangers. There is a capacity for a business to accumulate costs. They gradually grow month-by-month and your cash flow gradually diminishes to a trickle and finally dries up. Your only defense is to watch, record, compare and trend your costs.

Understanding what the numbers mean is crucial to your cash flow. Are sales trending up or down? Are expenses rising faster than sales? Is one product more profitable or better selling than another? How much do I need to sell to meet expenses each month? The answers all lie in the numbers.

The best way to measure cost trends is by analyzing the expense categories in your software, and ideally graphing them to get a better visualization of their impact. If the chart of accounts in your program is properly designed, you can produce the graphs for each cost item and quickly be able to see that your power bill, for example, is gradually rising. This new perspective can now lead to an informed change in behavior that will reduce those costs or at least reduce the increase in those costs.

Once you have established your costs, you should compare them against the industry average, or at least use your own common sense and business experience. If you keep your books accurate and up to date, you will be able to calculate the relationship between your gross sales and the expenditure in any category. For example, with the help of your historical data, you may decide that your postage should be 2% or 3% of gross sales. When you look over your month-end reports, you may discover that it has risen to 5%. Catching it early, you can now take corrective action.

If you are able to control your expenses, you can develop a healthy constant cash flow. Normally, it’s the cost of your expenses that sucks up your cash and put you in an uncomfortable position.

When your bills are greater than your sales/receivables, your first reaction is most likely that you need to increase sales and collections. Although that is always a good idea, even when there isn’t a cash flow problem, there is still very good reason to pay particularly close attention to your expenses. If when looking at your figures, you see that it takes five dollars to put one dollar on your bottom line, it then takes $5,000 of sales to yield $1,000. This means that saving $1,000 in costs is exactly the same as generating $5,000 worth of sales.

You need to look at your cash flow from an informed perspective. Here are five areas to focus on:

1. Mismanaging Credit
There are two common ways to mismanage credit in small business; granting credit without specific credit policies, and using credit with no plan for how to pay for it.

Both have a huge impact on your cash flow and are often closely related. For example, you have an opportunity to work on a big project, for which you will need to order materials. Your supplier expects payment in 30 days, but you won’t receive cash for the project for 60 days. Right away you’ve put yourself into a cash flow crunch that could take months to recover from financially. In the meantime, you’ve passed on smaller jobs that would have provided quicker cash at less cost. And, if you’re unable to pay your supplier on time, you’ve endangered that relationship as well.

2. The relationship between Receivables and Payables
In a perfect world, what customers owe you would be paid just in time for you to pay what you owe your vendors. But, as any small business owner knows “stuff happens”. The customer you thought would pay this week, doesn’t. So the bills you thought you’d pay this week, don’t get paid. Are your payables in balance with you receivables? If what you owe to others is far more than what is owed to you, then you have a cash flow problem. And if your receivables are particularly old, chances are good you’ll never see that cash at all.

3. Focusing on profit instead of cash flow
Is profit the ultimate goal of every business? Did you know that many businesses that fail are operating at a profit? How can that be? For the small business, cash flow is the ultimate goal. No cash flow. No business.

The difference is mostly in the decision making process. If you take on this big job, it will earn you a huge profit, but if you take on five smaller jobs, you’ll have cash to pay your bills. Yes, you want to be profitable, but every decision has to be measured against the effect it will have on cash flow.

4. Don’t forget your debt to the Tax Man
Some bills are easy to forget. Bills like sales tax, payroll taxes, estimated taxes. They just sit out there, almost off the radar. They don’t have to be paid right away. It’s easy to forget about them. But when they’re due, they’re due right now. And you better have the money to pay them or you’re in hot water with the Tax Man. That is not a place anyone wants to be. Pay them late or not at all and you end up with penalties and interest on top of what’s already due. Using the money that needs to go toward taxes to solve cash flow problems results in even more, and probably worse, cash flow problems when those taxes come due. It can take months or even years to recover.

5. Spending your company’s future on a sailboat
Haven’t you always wanted a boat, a fancy car, or a trip to Tahiti? It might be tempting to try to pass your personal purchases off as tax-deductible business expenses. But, it’s a bad idea for two reasons.

The people at the IRS are over-worked, but they weren’t born yesterday. The last thing you need is an audit that could reveal your transgressions and result in an unexpected tax bill plus penalties and interest. No company’s cash flow should have to suffer that indignity.

The other reason it’s a bad idea is that you are spending your company’s future on unnecessary expenses. Small businesses operate close to the edge. Unless you have a reserve to see you through the tough times, you’re always in danger of being on the wrong side of that edge. You must take care of the cash flow first. Then, you can pay yourself a properly taxed bonus and buy all the toys you want.

9 Strategies for Thriving in a Tough Economy

March 13th, 2012

Whether or not you believe we’re in a recession, or slowly moving out of one, or even if you have come to believe that what we have now is pretty much as good as it’s going to get, there’s no getting around the fact that we’re experiencing poor economic times. An enduring lack of consumer confidence and decreased sales threaten all businesses, but small businesses are particularly vulnerable as they often don’t have the reserves to help them survive difficult times.

Entrepreneurs who are survivors will look at this as an opportunity to improve their business practices so they can not only weather the tough times, but thrive during them. How, then, can you recession-proof your business? Thinking through the following practices and how you can make them your strategies will help ensure your small business’s success in a tough economy.

1. Protect your cash flow

To keep your small business healthy, cash needs to continue flowing through it. As long as your business exists, you will have expenses. But the harder times get, the harder it can be to keep the cash flowing into your business. Be more diligent in how you are spending money. It’s important to be frugal and aware of your income and expenses. By doing a line item cost for each expense, you will be able to identify areas that need greater attention. Efficient cash flow management is crucial. The sections below are all, for the most part, areas that will have impact on your cash flow, but take special note of the ones regarding evaluating your vendors, reviewing your inventory management, and keeping your personal credit in good shape.

2. Streamline your business practices

This is an opportune time to review your business procedures for effectiveness. Consider areas that can be combined into one. Consider areas that can be structured differently to reduce costs. Think about sharing resources, like administrative or payroll work, with other entrepreneurs to reduce overhead. The goal is to streamline operations so you can still provide a quality product or service, yet realize a greater profit by reducing the expenses to produce it.

3. Evaluate your vendors

If you use vendors for packaging, labeling, distribution, or in other areas of your business, this is a good time to do some price comparisons. There is a lot of competition among vendors to attract new business, so you could realize some serious savings in this area. Since no one wants to lose business during a bad economy, chances are good that your current vendors will meet the competitor’s price. If not, it’s time to move your business to the lowest bidder, just as long as you’re not sacrificing quality.

4. Review your inventory management practices

See what can be done to reduce inventory costs without sacrificing the quality of goods or inconveniencing customers. Are you ordering too many of particular items? Can an item be sourced somewhere else at a better price? Is there a drop-shipping alternative that will work for you, eliminating shipping and warehousing costs?

Just because you’ve always ordered something from a particular supplier or done things in a particular way doesn’t mean you have to keep doing them that way, especially when those other ways may save you money.

5. Focus on your core competencies

A diversification strategy is often recommended for small business success. But too often small business owners simplify the concept of “diversification” to “different”. Just adding other products or services to your offerings is not diversification. It’s potentially just a waste of time and money. Worse, it can damage your core business by taking your time and money away from what you do best. It may even damage your brand and reputation. If you have diversified out into different areas over the years to improve market reach, it might be time to regroup and focus on the core of your business and outsource the rest. Evaluate what is and isn’t working and put more effort into what started you out as a successful entrepreneur in the first place. It’s important to get in touch with your core business and make sure it continues to meet the changing needs of customers. So consider dropping the extras and focus on what you do best and which is most profitable to recession-proof your business.

6. Develop and implement strategies to get your competition’s customers

If your small business is going to prosper in tough times, you need to continue to expand your customer/client base. If you have competitors, then they have customers. So, there are already people out there buying what you sell, just not from you. What will it take to attract those customers? You’ll need to offer something more or something different. Research your competition and see what you can offer to entice their customers into becoming your customers. It’s not only lower prices or a better price/quality trade-off that gets the business. Providing better customer service is often identified as one of the easiest ways to outdistance the competition. But you need to do the research in your own market to find out what it takes to be the customer’s first choice.

7. Make the most of the customers/clients you have

They say that a bird in the hand is worth two in the bush. The bird in the hand is the customer or client you already have. These customers are an opportunity to make more sales without incurring the costs of finding a new customer.

Even better, he or she might be a loyal customer, giving you many more sales opportunities. If you want to recession-proof your business, you can’t afford to ignore the potential profits to be had from established customers. But remember that your customers are going through tough times too. In order to retain their business, implement measures to express your appreciation. This could be a one-time price reduction, a customer loyalty card, or a referral incentive. Whatever the strategy may be, it should be something of value to the customer and within your marketing budget.

8. Continue to market your business

In lean times, many small businesses make the mistake of cutting their marketing budget to the bone or even eliminating it entirely. But lean times are exactly the times your small business most needs marketing. Consumers are restless and looking to make changes in their buying decisions. You need to help them find your products and services and choose them rather than others by getting your name out there. So don’t stop marketing. In fact, if possible, step up your marketing efforts.

9. Keep your personal credit in good shape

Hard times make it harder to borrow and small business loans are often among the first to disappear. With good personal credit, you’ll stand a much better chance of being able to borrow the money needed to keep your business afloat if you need to. To recession-proof your business, keep tabs on your personal credit rating as well as your business one and do what’s necessary to keep your credit ratings in good shape.

There’s absolutely nothing that will make your small business one hundred percent recession-proof. But implementing the practices above will help ensure your small business survives tough times and might even be able to profit from them.

9 Steps to Manually Reconcile a Bank Statement

January 27th, 2012

A business must track its funds to have a clear picture of its financial health. Bank statement reconciliations are an tool that business owner’s use in a proper cash management process. This procedure compares the account balance, as reported by the bank, against the account register in the company’s general ledger. This process ensures all cash items clear the company’s bank account in a timely manner. It also prevents the company’s general ledger from becoming clogged with inaccurate or irrelevant information. Cash accounts with significant inaccuracies can mislead business owners into believing the company has better cash flow than it really does.

The process of preparing a bank reconciliation involves making adjustments to the balances in both the bank statement and the company’s records to confirm that the ending balances match and that every item is properly accounted for. It is important to prepare bank reconciliations in a timely and regular basis (monthly, for example), so if questions regarding bank fees or errors arise both the company and the bank can be made aware as soon as possible.

Because of the lag time between deposits made and checks written, and their actual posting to your account, it is rare for the ending balances to match. Reconciliation ensures all transactions are accounted for, and provides a true cash balance.

To preform a proper bank statement reconciliation, follow these nine steps:

1. Comparison

Start the bank reconciliation process with a comparison of the company’s bank statement and general ledger cash account. Check off all items that match. This part of the reconciliation ensures all items recorded in the general ledger have cleared the company’s bank account. Once an item clears the bank account, it usually represents the finality of that particular business transaction.

2. Add Deposits

Once the comparison process is complete, note all items that remain on the company’s general ledger. Add any deposits in transit to the ending balance. Deposits in transit are deposits that you have recorded in your register but have not appeared on the bank statement.

3. Outstanding Checks

Deduct outstanding checks from the ending balance. These checks have been deducted from your check register, but have not yet cleared the bank.

4. Bank Errors

Add or deduct any bank errors to the ending balance. Examples would be incorrect deposit amounts and incorrect debits.

5. Check Register Reconciliation

Deduct bank service charges. Service charges could be account maintenance fees, check overage fees if you wrote more checks than you are allotted for the month, wire transfer charges, returned check fees, etc.

6. Interest Earned

Add interest earned if you have an interest bearing account.

7. Check Register Errors

Add or deduct errors in the check register. These errors could include posting a payment that was not actually a cash transaction, or omitting a payment.

8. Journal Entries

You may need to prepare journal entries as part of this reconciliation process. These journal entries will correct any errors found during the bank statement and general ledger comparison. Owners can also use journal entries to post any bank statement items into the general ledger if necessary. Once all journal entries are posted, you may re-run the general ledger cash account to update the ending balance for all new posted items.

9. Compare Both Statements

Compare the adjusted bank statement balance per your reconciliation to the adjusted cash balance per the general ledger. The balances should be equal. If the two balances do not match review the steps; verify that the bank balance has been adjusted for all deposits in transit and outstanding checks, and that all activity has been properly posted in the company’s general ledger.

The Importance of Monthly Bank Statement Reconciliation

January 12th, 2012

The proper reconciliation of bank statements is vital for any small business. Even if you don’t have an accountant on staff, this procedure must be done monthly. Whether you use software such as QuickBooks, or you simply keep track of your bank records, you need to double-check that everything adds up.

Catching Errors

Even if you implement strict control measures, the potential exists for human error in . If companies fail to reconcile their bank statements every month, these errors may go undetected and they could be costly. For example, if a teller at the bank calculates a deposit incorrectly, the company may end up short of the funds it needs to continue doing business. Or if checks you have sent out are lost, or simply not yet deposited by the payee, you might see your bank balance and think there is more money in your account available for you to spend then would be wise. And if those lost checks are found and deposited, and those checks that someone has been holding onto for a few weeks are cashed when you do spend that “extra” money, you’ll soon be bouncing checks all over town. The reconciliation process helps provide a method of double-checking to avoid mistakes.

Following Up on Transactions

If a vendor complains about not receiving funds, it could be possible that a check was lost in the mail. When you are reconciling your bank statement every month, you can catch checks that have not cleared, and this will help you track down any potential missing payments. In addition, you can use your reconciliation statement to make sure your other company transactions are going through and have been calculated for the proper amount.

Keeping a Close Eye on Company Performance

When small business owners do not take the time to reconcile their bank statements personally, or at least see an overview of the results, they may be unaware of potential income issues or shortfalls. While delegating can help you manage your company better, you need to be able to see exactly what is going on within your company. Keeping an eye on bank statements can help you keep your finger on the pulse of your company and spot income fluctuations.

Loss Prevention

When bank statements are not monitored and reconciled, the potential for undetected loss is high. Not all employees or firms are honest, and you may not miss money that has been taken for some time. This is how some employees are able to embezzle thousands if not millions of dollars over time. Reconciling your bank statement helps you prevent losses and may indicate a potential problem in your system.