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Cash Flow Management Tips – Invoice Fast!

Cash Flow Tips - Invoice Fast

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. 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.”

Cash Flow Management Tips - Invoice Fast!

“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.” – Rob Reider & Peter B. Heyler

It’s no secret – most startups fail because of poor cash flow management. These businesses fail to create a cash flow plan that tracks the ebbs and flows in the business’ cash life cycle. The result is often a total disaster. Common problems associated with businesses that fail to develop a cash flow plan is their inability to pay landlords, vendors and employees.

But why do smart and talented entrepreneurs drop the ball so often when it comes to projecting their cash flow? The answer for many is that they are being 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.

Founded in 1997, eToys.com is an example of the critical role that cash flow management plays in the viability of a business. eToys was a retail website 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 competitor 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.”

By all accounts eToys was a successful venture. However, eToys’ lack of attention to cash flow management resulted in turning the profitable venture into another cash-bleeding dotcom that resulted in a fire sale acquisition by the competition.

But cash flow management is not a concern only for startups. Cash flow management must be a critical component of any business. 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.

Based on the research, it’s no surprise that positive cash flow is a key indicator of a company’s strength. A question that every business owner must ask is, “How much cash did the business bring in today?”

  • 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.
Cash Flow Management Tips - Invoice Fast!

“Owners who cannot efficiently manage their cash flow are almost certain to fail.” – Michael Lewis

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.

Where many entrepreneurs go wrong is assuming that income is the same as cash flow. But it’s not. A business can have excellent income but poor cash flow. In fact, as the eToys story demonstrates, 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.”

 

Cash Flow Management Tips - Invoice Fast!

“Cash flow is the lifeblood of a business and critical in its growth.” – Caron Beesley

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 purchasers 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.”

Cash Flow Management Tips - Invoice Fast!

“The cash manager must know how to effectively manage the factors that will reduce credit abuses and the amount of time receivables remain uncollected.’ – Franklin J. Plewa, Jr. and George T. Freidlob

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.”

While providing trade credit to purchasers helps the business generate sales, 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 keep itself away.

Invoice Fast!

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.”

Cash Flow Management Tips - Invoice Fast!

“Time is money.” – Benjamin Franklin

Businesses that delay invoice delivery on credit sales will likely receive their payments late due to the processing time of accounts payable departments. Late collections means less cash in the bank to operate the business. 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 and provide credit to buyers, are often put under duress. The sale may require the purchase of additional inventory or other expenses (people, equipment, etc.) without access to the cash from the sale. Strong cash flow management alleviates some of the stress and reduces the need to rely on lines of credit and other gap funding solutions.

Cash flow management is not sexy, nor exciting. If cash flow management has gotten exciting then the business is likely 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.'”

Cash Flow Management Tips - Invoice Fast!

“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.'” – Rob Reider & Peter B. Heyler

Xero, a leading maker of cloud-based accounting software for small and midsize businesses, provides the following tips to improve cash flow through invoicing.

1. Email your invoices – do away with snail-mail

Almost everyone is on email these days. Gone are the days when a mailed piece of paper is the norm for invoices. Mailing invoices only delays payment! First, there is the time it takes for the mailed invoice to reach the customer. Second, there is a likelihood that the customer will put the invoice in a drawer and forget about it.

A sound cash flow management process makes use of invoicing software that lets the business owner deliver invoices directly into a customer’s accounts payable manager’s email inbox.

Cash Flow Management Tips - Invoice Fast!

How to email an invoice

2. Be clear with your payment advice

In your payment advice, encourage your customers to pay you using an online 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.

Cash Flow Management Tips - Invoice Fast!

How to add payment advice to your invoices

Also, make sure your customers can’t miss your payment advice. Repeat it in the emails that go with your invoices.

How to add payment advice to your email templates

3. Send online invoices – not just PDFs

To dramatically increase the chances of getting paid as soon as customers receive an invoice make use of a “Pay Now” button within the email. Customers don’t even have to think about when or how they’ll pay. They’re likely to pay immediately.

Cash Flow Management Tips - Invoice Fast!

How to attach a payment service to your online invoices

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. Attach files directly to your invoices — this is ideal for supplying your customers with details such as work schedules, contracts and product specs.

Cash Flow Management Tips - Invoice Fast!

How to attach files to your online invoices

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.

How to set a default due date

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 work is completed, rather than waiting until month-end. Look for invoicing products that make include a mobile app so that invoices can be delivered from anywhere. Mobile apps maximize downtime, such as allowing the delivery of invoices while waiting for lunch or sitting in an airport lounge.

How to download the Xero mobile app

Try Xero for Free

SPONSORED POST DISCLOSURE: I received compensation in exchange for featuring Xero in this article. Although this post is sponsored, all opinions are those of the author.

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About Jesse Torres (40 Articles)
Jesse Torres has spent over 20 years in leadership and executive management positions. Jesse maintains a wide range of skills that include risk management, internal audit, operations, information technology, marketing and public relations. Jesse has written books and articles related to entrepreneurship, marketing, and social media. Jesse is a contributing writer for Entrepreneur, a frequent speaker at conferences and is often interviewed by business publications. He holds a B.A. from UCLA and is a graduate of the Pacific Coast Banking School. He holds several certifications, including Certified Information Systems Auditor, Certified Internal Auditor and Certified Information Systems Security Professional.

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