Businesses in a heavy growth phase may experience an extreme cash crunch due to ever increasing demands of a growing enterprise.
Cash flow is vital but how to control it?
1. If you extend credit, be sure to monitor accounts receivable regularly. Have a person who is dedicated to watching the A/R at least on a weekly basis. If necessary, tighten the credit policy based on a customers’ history. It’s far better to lose a sale then to not get paid for service or product already delivered.
2. Avoid auto pay for bill payments. It can be easy and tempting to set up all of your bills on auto pay but what happens when you fall a little short of cash one month? Yep, everything either bounces or you rack up hundreds in overdraft fees. A better idea, use the on-line bill payment features but you decide when it gets deducted. This allows you to pay things slightly late if you have to but avoid bank fees that can overdraw your bank account quickly. In some cases the late fee for the bill you had on auto pay is lower than the overdraft charge.
3. If you are not able to pay a bill, it’s best to contact your creditors and be honest and up front with them. Avoiding their calls and letters is provoking and can result in more late fees or legal action. Dealing with the issue pro-actively helps in preserving your future credit and your vendor relationships. This advice rings especially true if you owe any back taxes. Call or write the tax agency without delay to make a payment plan and let them know you are not evading your payments.
4. Know what your break even point is for cash flow. Do you know what your minimum monthly cash requirements are to meet basic operating expenses and debt payments? If you don’t meet the minimum, how will the shortfall be met? Answering these questions is an absolute necessity.
5. If cash flow is volatile, keep your payments flexible. It may not be best to sign up for any long-term contracts or leases if you can’t project solid cash flow in the near future.
6. Have a contingency plan for each stage of your business. If sales are x, then we will do y. Keep the plan flexible and be aware of your situation at all times.
7. Stop the money leaks in your business. Even when you’re flush with cash, build good management practices by monitoring and eliminating wasteful spending.
Cash flow is the life blood of any business and needs constant monitoring and attention. This is particularly true during high cash flow seasons as well. The biggest cash flow problems I’ve seen have been businesses that have a lot of cash, get complacent, then end up in a crunch because of poor or no planning.
Read about stopping the “money leaks” in your business and Download a free report for more tips.