Cash Management Optimization Strategies That Will Serve Your Business Well
Cash is queen, and in your business, it is everything. All your financial management activities revolve around cash management optimization and ensuring that you are bringing in sales that convert to cash so that you can meet your financial obligations and have profit left over to reinvest into your business. It is a cycle that needs to be managed well.
Statistics show that 82% of businesses fail due to financial mismanagement, so it is in your best interest to invest the time it takes to ensure you have adequate cash flow management techniques in place to ensure that your business will be around for the long term.
Read: Cash Confident and the Business Owner: How to Achieve Your Financial Dreams
Cash management strategies
There are many cash management strategies that you can use to ensure you have a steady flow of cash coming in to meet your financial obligations. Most accounting software systems now include cash management reports that will generate easily at a click of a button. These reports are valuable in that they map out the cash in the bank, and deposits you are expecting and any upcoming bills that need payment.
Cash management reports are valuable as they keep you abreast of the financial obligations that require payment and warn you if your cash balances will meet those financial payments.
Often there are timing differences from the date you expect to receive deposits to dates that you are required to pay. When that happens, it is vital to have a cash reserve on hand in your business to cover these times.
I recommend keeping a cash reserve that will cover 3-6 months of business expenses. I understand that can be difficult for some businesses to save that kind of cash, especially for those in the start-up and growth phases, so if that’s you, try getting a line of credit for your business to help you out when cash shortages arise.
Try to stay away from credit card debt and carrying balances on your credit card because credit cards charge high interest rates. It is better to have a lower cost line of credit set up than to rely on credit cards to get you through cash crunches.
Follow these 4 tips on cash flow management techniques to help you get payments quickly:
1. Invoice immediately
If you don’t offer point of sale payments, you need to invoice as soon as possible. Make sure once contracts are signed that invoices go out immediately to not delay the payment process. The sooner you get payment from a client to your bank account, the easier it will be.
2. Monitor your aged accounts receivable reports
This is a vital step that many businesses owners neglect. Aged accounts receivable reports help you identify clients who are slow to pay. Once they have gone over the grace period of invoice payment, you need to reach out to them (either you or a team member) to follow up about the outstanding invoice.
The big mistake I see business owners make is to not follow up right away. The longer you wait to follow up, the chances of collecting on that invoice decrease and opportunities for misunderstandings increase. Often it is just an oversight where the client needs to be reminded of an outstanding payment.
3. Offer discounts for early payments
Service-based businesses often offer discounts for those clients who want an incentive to pay earlier. It is typical to invoice a client and expect them to pay within 30 days. If you want to see money coming in sooner than that, you can offer a discount of 1-5% of the invoice if they pay within 15 days. Or choose any combination that feels good for you. The idea is to get that money in the door earlier than the standard 30-day timeframe.
4. Charge penalties for late payments
Often a deterrent to customers not pay late is to charge interest fees from the first day the payment is late. If there is no incentive to pay that invoice quickly and on time, clients may abuse that and consistently pay late. You want to get that money in the door, and it is standard practice to charge a penalty of 10-30% interest fee for late payments.
The bottom line is that cash flow optimization strategies are essential to use in business. Because cash is queen, and you need good cash management strategies in your business to ensure you stay in business for the long term, you should invest the time it takes to understand (at the high level) what you, as the CEO of your business, need to understand when it comes to managing the finances in your business.
Grab your free 5-Step Roadmap to a Profitable Biz here to learn more about financial management in your business.
