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7 Tips for Improving Your Cash Flow

They say cash is king. Find out how to give yours the royal treatment.
June 12, 2006
URL: http://www.entrepreneur.com/article/159782

There's a golden rule in business you'd be smart to learn now: No matter how much you sell, if you don't collect the money, you're going to go out of business. As business owners, we often get so wrapped up in selling our products and services that we forget to take the time to ensure we're managing our cash flow and receiving the money for those sales. But when it comes to your bottom line, you'd be wrong to simply focus on total sales dollars: You also need to focus on the cash collection of those sales.

To help get that money in the door, here are seven tips for improving your cash flow:

  1. Require a down payment on projects so that your customers fund the project, not you.
  2. Set your terms to be payment in full upon completion. Don't extend out 30 or 60 days after you've completed your work. You don't get to use your hard-earned cash until payment is received from your clients, so get it as soon as you can.
  3. Negotiate terms with your vendors for 30 days or more so you have an opportunity to complete the work, bill your customers and receive payments prior to paying your vendor.
  4. Have a collection process in place, and follow through. When your customers delay payments, they're using your cash. You need to ensure that you're being diligent in collecting from your customers.
  5. Set up a line of credit at your bank that you can use in case of emergency. Often, lenders rates will be less than the late fees your vendors will charge. This line of credit will help you cover a lapse in cash flow for short periods of time.
  6. Factoring of your receivables allows you to sell your receivables and get cash now instead of waiting 30 or 60 days. There's a fee for using a factoring service, so you need to ensure that the benefits of getting cash today exceeds the cost you'll pay for that expedience.
  7. Minimize the amount of draws you take personally from your business. Each dollar you take from your company reduces the amount of cash flow you'll have available for the business to grow.

Not all these options will work for every business--you have to consider which of these will work for your specific needs.

Here's one last tip: Don't ever think you're too busy making sales and working in your business to worry about your cash flow. This mindset is the very thing that can put a business out of business when there's no cash to pay the bills. So take the time to analyze your business's cash flow to locate--and make--some small changes that will have a big impact on your cash flow.

Remember, your cash flow is not the same as your profits. You can have a profitable business, but a negative cash flow. Prepare a monthly cash flow statement to ensure that you don't get caught unexpectedly without enough cash to handle your day-to-day operations.