Managing Cash Flow: 5 Things You Need To Know

Managing Cash Flow: 5 Things You Need To Know

If you ever played Monopoly, you learned that by managing your cash flow wisely, you could buy a bunch of houses and hotels -- and win. If you didn't manage it well, you might wind up in jail or penniless.

Small wonder that aside from bankruptcy and audit, the term cash flow is probably the most terrifying in an entrepreneur's dictionary. According to a survey by Intuit, 22 million of the nation's smallest business are waiting for approximately $1,500 in overdue payments every month, creating a $33 billion logjam on their cash flow. In the same survey, 42 percent of business owners said they stay up nights worrying about how quickly they will be paid.

Obviously, the money your customers give you is cash flowing "into" your business, and the checks you're writing to pay salaries, suppliers, utilities and others constitutes the cash flowing "out" of your business. And as entrepreneurs know, a positive cash flow is the holy grail for all business owners.

But when more money flows out than in, you've got a problem. Want to better manage cash flow? Here are five things you need to know.

1. Anticipate everything.Not that you can anticipate everything, but if you can see trouble ahead, "You can reduce inventory or stretch your payment time to your creditors if you have to," says Mary Ann Campbell, a spokeswoman for IndexCreditCards.com. "You want to cut your losses and costs quickly."

Not surprisingly, William A. Andrews, director of the Prince Entrepreneurship Program at Stetson University, says planning ahead can reduce the chances of a cash crisis. "By keeping a cash budget -- a careful projection of how much money you anticipate having in the corporate checking account at the beginning of each of the next 12 months -- you can estimate with a fair degree of accuracy if and when you will run out of money and how large of a credit line you will need to get you through the months of negative cash flow," he says. "Equally important, you can identify your need for a credit line months in advance, so when you approach your banker, they will be more inclined to give you a loan than if you show up on Tuesday fretting about not being able to meet payroll on Friday."

And how, exactly, do you do that? "Despite its usefulness, few small businesses keep a cash budget," Andrews says. "Most accountants can help you set one up."

2. Bill promptly.Alice Bredin, a small-business adviser to American Express OPEN, suggests having a system in place so you don't slip up and forget to bill a client and can recognize immediately if a check is late. "The longer you let an invoice go, the less likely you are to get paid," Bredin says. Don't hesitate or worry about being too aggressive in trying to get your money. First, it's money you earned, and second, if an invoice is being held up, "It may have been sent to the wrong person, and you need to figure that out, pronto."

3. Pay your own bills on time.A lot of experts suggest asking clients if you can pay within 45 days of a service, rather than the typical 30. If your cash reserves are weak, it's better to pay on Day 29 than Day 2. On the other hand, karma is real, especially with business relationships. So if you can pay the people you owe quickly, you should. If you're paying suppliers as slowly as possible, and they're the ones calling you to see when the check is going in the mail, don't expect a lot of favors in return -- and you may find that as you pay slowly, you're no longer considered an important client. That type of reputation change can subtly affect your cash flow and business as a whole.

4. Hoard cash.Especially if your cash flow is up and down, it's essential to put something away for those lousy months, according to David Stone, president of Nevada Association Services, a Las Vegas-based collections agency. "If you can build an internal cushion for your company to be able to survive the dry spells and therefore don't need to put pressure on your clients for payments, when they are able to pay you, you will seem like the hero," he says.

How much should you put away? Bredin says most accountants suggest having six months' of expenses tucked away, or at the bare minimum, two or three. But she adds, "I hesitate sometimes to give numbers because they can seem so overwhelming." Her advice? Save -- "as much as possible."

5. Market your business.Market even when you're busy, and especially when you're busy. This is a lot easier said than done, but seasoned entrepreneurs will tell you that if you don't keep looking for ways to keep customers and dollars coming, suddenly you'll find yourself in a lull. You may enjoy the break, but lulls can easily lead to a lack of cash flow.

The original version of this article appeared on AOL Small Business on 11/11/10.

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