This article is the first in a series of posts (Cash Flow Management Tips) aimed at providing entrepreneurs with valuable and immediately actionable cash flow management tips. Business owners know that Cash is King when it comes to staying in business. Sales and revenues mean nothing if they can’t be converted into the cash that is needed to keep the business running. Read on to learn how simple invoicing techniques can help dramatically improve your cash flow and keep your business running. This is a sponsored post.
Michael Lewis, a former business executive and financial blogger, does not sugar coat things when he says, “Owners who cannot efficiently manage their cash flow are almost certain to fail.”
The same thought is echoed by Rob Reider and Peter B. Heyler in their book, Managing Cash Flow: An Operational Focus Focus. Reider and Heyler write, “Effective cash flow management is essential to the survival of the business. It may be even more important than producing goods or services or generating a sale.”
It’s no secret – most startups fail because of poor cash flow management. The problem of many startups is that they are stretched too thin. They are focused on marketing, sales, product design and innovation – everything except managing the in’s and out’s of cash. Too often business owners don’t realize their cash flow problems until it’s too late.
eToys.com was a retail website, founded in 1997, that sold toys via the Internet. The company, while successful in growing its brand and sales, went bankrupt and was ultimately forced to sell to Toys “R” Us in February 2009.
Bryan Borzykowski wrote for the BBC in July 2014, “A lack of funds was a big reason why eToys folded. In the year it went bust, the company was actually bringing millions of dollars in revenue, but because the company was expanding quickly, it was also strapped for cash.”
But cash flow management is not something of concern only for startups. It must be a critical component of any business administration. TGG Accounting‘s CEO, Matt Garrett, cites in an Entrepreneur article a 2012 University of Tennessee study that found that 72 percent of businesses went bust because they ran out of cash.
Positive cash flow is a key indicator of a company’s strength. A fundamental concern of every business owner must be, “How much cash is the business bringing in to pay for things?”
|Positive Cash Flow: Occurs when the cash being collected by the business from sales, accounts receivable, etc. is more than the amount of the cash exiting the business through accounts payable, monthly expenses, salaries, etc.||Negative Cash Flow: Occurs when the amount of cash leaving the business is greater than the amount of cash entering the business. This can result in a downward “death” spiral if not addressed quickly.|
A business with increasing cash flow is stronger than one with stable or decreasing cash flow because the business is able to more easily pay back its loans, reinvest in its business, return money to investors, pay ongoing expenses and set aside funds for the unexpected.
Cash flow is not the same as income. A business can have excellent income but poor cash flow. In fact, it is not unheard of for business owners with good income but poor cash flow to sell their business or close their doors altogether, because they lack the cash flow to keep the lights on.
Every day new entrants throw their hat into the ring of entrepreneurship. And every day many fail. Many of these entrepreneurs, after spending considerable time fine-tuning their business plans, find themselves scratching their head, wondering why their company, with its innovative product or service, suffered such a fate.
In a great many cases, the reason is easy: cash flow.
Cash Flow is the Lifeblood
“Cash flow is the lifeblood of a business and critical in its growth,” says entrepreneur and marketing communications consultant Caron Beesley. “With money tight and bank loans hard to get, a cash-strapped company can easily be pushed to the brink.”
Mastering cash flow comes down to a set of actions that allow the entrepreneur to track and control the timing of funds coming in and going out of the business. The worst thing that can happen to a business is having liabilities come due, like payroll and rent, and not having the funds to cover the expense. What do you tell your employees? What do you tell your landlord? What do you tell yourself? To often this is the beginning of the end for the business.
Adding to the challenge is the expectation in many industries that a business provide trade credit to purchasers. This creates an additional burden on the business as cash from sales is delayed.
“Often, a company uses credit as a sales tool. U.S. business practice has a long tradition of extending credit to purchases of goods and services,” write Franklin J. Plewa, Jr. and George T. Freidlob in their book, Understanding Cash Flow. “The cash manager must know how to effectively manage the factors that will reduce credit abuses and the amount of time receivables remain uncollected.”
Imagine a small or midsize business that must provide customers with a 30-day repayment period to remain competitive in the marketplace. Plewa and Freidlob write, “The availability of credit can help a company expand its market share if potential buyers perceive little difference between the company’s product and those of its competitors.”
Every time a credit transaction occurs, it places a strain on the business. While the buyer need not provide payment for 30 days, the company must continue to meet its current financial obligations. Payroll, inventory, rent, utilities and other expenses must be paid regardless of the delay of cash from credit sales. With every dollar of revenue, the business digs a deeper hole from which it needs to climb out.
Given the importance of cash flow to small and midsize businesses, the rule of thumb for strong cash flow is INVOICE FAST!
Small and midsize businesses must get into the practice of billing credit customers immediately. The invoice must be delivered as soon as the goods are shipped or the services have been provided.
But sending the bill is just one part of the process. Businesses that have mastered their cash flow make use of invoicing tools that are fully integrated into their accounting systems and provide invoices via email. In addition, providing the customer with the ability to make an electronic payment directly from the email speeds up the collection of cash and reduces the amount of time needed to process paper checks.
The tighter the integration of the invoicing system to the accounting system, the less time is spent reconciling the accounts receivable and the more time there is available to dedicate to bringing in more sales!
Even if the business does not offer credit, sales invoices must be delivered as soon as an order arrives to ensure that cash is collected promptly, the product or service is provided quickly and the transaction is completed as fast as possible. Successful small and midsize businesses live by Benjamin Franklin’s motto, “Time is money.”
Businesses that delay invoice delivery on credit sales will likely receive their payments late due to the processing time of accounts payable departments. Businesses already drag out their payables as long as possible. Don’t give them another reason to pay slow.
Every business owner dreams of making the “Big Sale.” Unfortunately, businesses that make big sales are often put under duress because they may then require the purchase of additional inventory or other expenses (people, equipment, etc.) without access to their cash from sales. Strong cash flow management alleviates some of the stress and reduces the need to rely on expensive lines of credit and other pricey gap funding solutions.
Cash flow management is not sexy, nor exciting. If cash flow management has gotten exciting then you’re likely in in the middle of a bad storm. The takeaway for entrepreneurs is that cash flow management is a fundamental aspect of the business and it needs to be watched and managed closely. Entrepreneurs must realize that a business cannot operate very long when cash outflow exceeds cash inflow. All businesses, particularly small and midsize businesses, must zealously monitor their cash flow to prevent serious business disruptions. In business, Cash is King and cash flow management must be priority number one!
Cash Flow Management Tips
Reider and Heyler write, “Cash flow management is a continual effort to smooth out fluctuations and focus on the Goldilocks Cash Management Principle: ‘not too much; not too little; but just the right amount.'”
Xero, a leading maker of cloud-based accounting software for small and midsize businesses, provides the following tips to improve cash flow.
1. Email your invoices – do away with snail-mail
Almost everyone’s on email these days. Gone are the days when a formal piece of paper is the norm for invoices. Posting your invoices only delays payment — firstly there’s the time they take to reach your customers, second, there’s a high chance your customers will put your invoices in a drawer and forget about them. In Xero, you can email your invoices directly after you create them — just click ‘Email’.
2. Be clear with your payment advice
In your payment advice, encourage your customers to pay you using a payment service such as Stripe, rather than by check. Checks take days to clear, can get lost in the mail and can bounce. If you prefer electronic payment — say this in your payment advice. In Xero, go to ‘Invoice Settings’ to set the payment advice that appears on all your invoices.
Make sure your customers can’t miss your payment advice — repeat it in the emails that go with your invoices. In Xero, go to ‘Email Settings’ to set up an email template that includes your payment advice. Setting up a template means all your emails will include your preferred payment options — you don’t need to retype them every time you email an invoice.
3. Send online invoices – not just PDFs
Want to dramatically increase your chances of getting paid as soon as your customers receive your invoices? With online invoices your customers simply click on a link you send them, then click on a Pay Now button. Your customers don’t even have to think about when or how they’ll pay you — they’re likely to pay you immediately. In Xero, online invoicing is set up for you – we provide the online invoice link every time you email an invoice, all you have to do is attach your payment service.
4. Attach files to your invoices – don’t give your customers a reason to query your invoices
Give your customers all the information they need as soon as you invoice them. Otherwise, your customers might use lack of documentation as an excuse to delay payment. In Xero, you can attach files directly to your invoices — this is ideal for supplying your customers with details such as work schedules, contracts and product specs.
5. Get your due date right
For the line of business you’re in, find out what’s common practice for due dates. If all your competitors ask for payment in 14 days, don’t be the business where it’s OK for your customers to pay you by the end of the following month. In Xero, set a default due date so you don’t have to think about it every time you enter an invoice.
6. Invoice as soon as possible
Finally, it goes without saying that the sooner you invoice, the sooner you get paid. Get into the habit of invoicing as soon as you complete work, rather than waiting until month-end. Xero has a mobile app, which means you can invoice from anywhere — so use otherwise wasted time, such as waiting in an airport lounge, to do some invoicing.