For business owners, two of the most important signs that you’re headed in the right direction are sustained growth and increasing profits. You deserve to breathe a sigh of relief once you’re out of the red zone, but you shouldn’t become complacent. Even big and successful companies face an occasional cash flow problem.
According to a CB Insights study, a third of startups fail due to cash flow problems. A U.S. Bank study is even grimmer: around 8 out of 10 businesses close up shop due to poor financial management. The importance of cash to the health of a company cannot be overstated. It’s the most critical key to a firm’s success or failure.
Opening a business savings account is a good start, but you also need to practice proper cash management. Here are a few tips and tricks to get your cash flow on the right track.
1. Consider leasing
Leasing often seems counterintuitive if you compare the one-time cost of a purchase to the total amount you’re going to spend on a lease. However, if your business is short on cash, your priority should be maintaining an uninterrupted cash stream for day-to-day operations.
Whether you’re leasing a warehouse, equipment, or even supplies, you can negotiate a contract that will allow you to pay in tranches, which helps for cash flow management. In many jurisdictions, lease payments are counted as a business expense, which comes in handy during tax season.
2. Don’t delay invoices
If you want to minimize delayed payments, then you should send invoices out as soon as possible. For regular or recurring customers, you also need to maintain a minimum level of consistency: transparent breakdown, same invoice date every month, an electronic and hard copy.
Once your business grows past a certain point, you might want to invest in software-based accounting to allow for invoice automation. Even if your clients are late when it comes to payments, the important thing is to cover your base.
It also helps to set up automated reminders a week before the due date, on the actual date, and a few days past due. Once you’ve sent out an electronic copy of the invoice, you can then call your customers directly to remind them of the payment.
3. Reward early payment
Just like you, your clients are looking for ways to reduce overhead expenses. One way to improve your cash flow problems is to reward those who pay their invoices ahead of schedule.
For instance, if the payment is due a month after receipt of the invoice, you can offer discounts if payment is made within the first two weeks. Another method is giving incentives to repeat customers with a track record of early fees.
4. Charge a late fee
Penalties for late payments encourage clients to meet their financial obligations on or before the due date. Delayed payments are a typical cash flow management tactic, but your cash flow could suffer if most of your clients follow the same practice.
These things will help you better manage your company’s cash flow. Small changes to your process, such as providing incentives and penalizing late payments, can do wonders for your bank account. Always send invoices out on time and find ways to minimize operational costs.