8 Tips for Managing Your Cash Flow

Updated: May 06, 2009


"Happiness is a positive cash flow" goes an old business saying. Happiness is hard to find and hold on to during an economic slowdown like the current one. The very term, "economic slowdown" states the problem: cash is not flowing as freely as it used to. We're in a drought, and every one of us has to conserve cash carefully. Here are a few tips for managing your cash flow.


1. Monitor your cash flow daily. Check your bank balance online. Create a cash flow projection spreadsheet in Excel or the free Open Office spreadsheet module. Search Google for "cash flow projection template" and you will save a lot of set-up work. The cash flow projection will tell you the difference between when you think money is arriving and when it actually arrives. The difference may alarm you. Even the best customers slow their payments during lean times, making yours leaner. Usually, they don't tell you they're holding on to that check for a few more days.

2. Collect payment efficiently. If your payment terms are net 30 days then begin collection action on day 31. Some companies send out payment reminders a week before a due date. Don't be afraid of losing slow-paying customers. It wouldn't bother you to get rid of a slow-moving car. Don't worry about "looking desperate," either. It's better to be happy with a positive cash flow than to look happy with your own past-due notices.

3. Choose your customers carefully. Generally speaking, the bigger the customer the longer he thinks he can get away with not paying you. I have a two-person client who pays me twice a week via Paypal. I once had to call the Chairman of Time about a $150 invoice that was over 90 days old. FedEx delivered that check by 10:30 the next morning. That's another tip: C-level executives care about their companies' reputations. Front-line staffers often care only about their performance reviews.

4. Offer discounts for prompt payment. The accounting term, "2% 10, net 30" on an invoice often moves it to the top of the accounts payable heap. It means that the customer can take 2 percent off the invoice amount if you receive payment within ten calendar days of shipping goods or completing services. Otherwise, the full amount is due by day 30 after shipment or completion. Taking advantage of this 2 percent discount gives the customer a 36.7 percent annual rate of return on their money, something that will grab his or her attention if they're awake at all. The math proving this startling rate of return is pretty simple; you may want to include a note about it with your introduction of such a discount, or even on every applicable invoice:

Amount of discount/Discounted Price X Number of days in the (accounting) year/number of days paid early

"2% 10, net 30" works out as follows:

2 divided by 98 = .020408
360 divided by 20 = 18
18 times .020408 = 36.7percent

Of course, you lose at the same 36.7 percent rate when you offer discounts, so use this carrot sparingly!

5. Have credit lines lined up before you need them. The time to arrange a line of credit with your bank, credit card company or other lender is when you don't need it. That's when your balance sheet and cash flow projections look most comforting to the lender.

6. Check credit backgrounds. You should run credit checks on new customers applying for credit. To be extra safe, check the credit reports of all significant customers — say, those who provide 80 percent of your revenues — even if they are currently paying you on time. It's better to know about a company's payment problems beforehand. As another old saying goes, "In God we trust. All others pay cash."

7. Cut internal costs ruthlessly.
Switch to a free checking account. Change phone and Internet service providers. Renegotiate your lease when it comes due and don't be afraid to reject rent increases. Post "turn off lights" signs on all light switches and install compact fluorescent bulbs. Replace the free coffee pot with a vending machine. Buy recycled printer cartridges and go pick them up yourself instead of paying delivery charges. If there's a coupon-clipper in your family, it won't hurt to have that person take a sharp look at where money goes in your office.

8. Face reality, no matter how unpleasant.
When your cash flow projection says you are headed for negative numbers, act immediately. Don't bank on that big deal coming through just in time, it is unlikely that it will. Once you get behind on your bills, with late fees and interest piling up daily, it becomes even harder to get ahead again. Face problems while they are ahead of you, not when they're on top of you.

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