No matter the state of the economy, cash is king, and a lack of positive cash flow can cause a small or midsize enterprise (SME) to fail. SME leaders and decision-makers may want to consider adopting a disciplined approach to cash-flow management to help optimize profitability during good times—and help prepare for any belt-tightening that comes with challenging times.
In simplest terms, cash-flow management involves finding ways to slow your outflow of money while accelerating its inflow, so you don’t run out of cash when you need it most.
Business Cash-Flow Management Begins with Planning
It’s likely that your business has its own unique pattern in terms of when customers pay you and when your highest expenses are due. The first step in turning your business cash flow positive is to clearly understand these patterns.
Chances are, you already know when you have to pay your employees, when business rent or mortgage payments are due and when payments are due on equipment (e.g., payments on a truck). Beyond this, are there times of the month, quarter or year when you typically pay out sizable amounts of money but payments owed to you haven’t yet been made? Is there a time of month when accounts receivables are most often paid? To answer cash-flow questions like these, review your monthly accounting and business credit card statements and track your bank statements to see if balances consistently drop at specific times.
When engaging with a new customer, consider asking how they would like to be paid. You can then establish a routine immediate payment mechanism (and expectations) along with your new relationship.
Then, consider issues that are a bit less predictable. For example, what would happen if a major client suddenly didn’t pay on time? If you’re a retailer, what would happen if a major local employer announced layoffs? If you’ve engaged a consultant on a one-time project, when will she bill? Will that happen at the end of the project, or at important milestones? Do you know when those milestones are coming?
Receivables: Getting Paid Faster
Now that you know more about your business cash flow, you can work on improving it.
First, consider receivables. Step one is to always bill ASAP, preferably on the same day you’ve delivered your product or service. Don’t delay invoices until they can all be written at once. Next, meticulousness matters: Make sure every invoice accurately reflects the customer’s payment instructions, including correct recipients and purchase order numbers. Rejected invoices mean delays that can wreak havoc, turning positive cash flow negative. Finally—and this is hard, as many companies strive to increase payment terms—try to move towards shorter “payment due” periods (ideally “due upon receipt”), at least with newer clients.
In connection with these steps, many companies accelerate payments by encouraging customers to use business credit cards or other forms of instant electronic payment. Credit cards can be especially attractive because you’re paid almost immediately while your customer may not be billed until next month.
When engaging with a new customer, consider asking how they would like to be paid. You can then establish a routine immediate payment mechanism (and expectations) along with your new relationship. As you move more payments to business credit cards, also look for opportunities to use today’s popular subscription paradigm by arranging automated payments for services you regularly deliver every month.
Payables: Using Credit Cards to Help Smooth Business Cash Flow
Like your customers, you can also smooth cash flow by moving more payments to business credit cards—especially payments that are due immediately. Consider credit cards that offer special features focused on helping with business cash flow.
For example, certain business credit cards may give you as much as 60 days to pay. Some let you carry a balance from one month to the next. Some let you choose what time of month you’ll be billed, to accommodate cash flow patterns you’ve identified. Some even give you an early pay discount if you happen to have extra cash in a given month.
So, too, some business cards provide tools for scheduling electronic payments to vendors in advance. That lets you hold onto precious cash as long as possible, and still be sure your payments will arrive in time to avoid late fees. Don’t forget the side benefits of scheduled e-payments. First, you write fewer checks. Second, depending on the card, credit card payments may offer you rewards or rebates that you can reinvest into your business.
Maintaining timely payments on certain business cards may even qualify you for short-term business financing from the card provider. These could include fixed-fee, no-interest loans to fund strategic projects; working capital to strengthen cash flow and bridge temporary gaps; or even debt consolidation loans that lower your overall interest payments.
The Takeaway
Experts recommend that every SME keep cash flow management top of mind. That involves implementing best practices for receivables and payables. Business credit cards can be a useful tool for optimizing cash flow on both ends.
Read more articles on managing money.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any financial or business strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL ADVICE. The views and opinions expressed in authored articles on American Express represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express Business Trends & Insights). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this
