Better Cash Flow Management | How-to Guides for running your business from Business.com

For a business to succeed it must have more money coming in than going out — but even this situation doesn't guarantee long-term health. After all, if your bills come due before customers have paid their bills, you'll run out of cash and your business will run aground. To keep money flowing in a positive direction, you need to practice good cash flow management. By managing your business funds properly, you can:

Take advantage of opportunities when they arise because you have cash on hand.
Ride out rough spots when payment might take longer than usual.
Grow your business.

Action Steps
The best contacts and resources to help you get it done

First, get a handle on your cash flow

In order to better manage your cash flow, you first need to understand its current status. To do so, create a cash flow statement (income vs. outgo over a period of time, such as a week, a month, or a quarter).

I recommend: Most small business accounting software packages will help you generate a cash flow statement, including QuickBooks and A-Systems Accounting Software. You can also create one fairly easily in an Excel spreadsheet by using a free template provided by Matt Evans, CPA, on his Web site or this free template offered by The Excel Nexus.

Get funds faster

Cut down the time between a customer's order and receipt of payment by having customers fax or e-mail orders instead of mailing them. Mail out invoices the same day a customer places an order, and prominently place a due date for payment, along with a notice of a late payment fee if that date isn't met.

I recommend: If you take orders from across the country, consider setting up lockboxes in faraway locations. A lockbox is a post office box run by a bank, and if cross-country customers mail payment to a local lockbox instead of you, the checks will be deposited more quickly. To set up a lockbox, contact Bank of America, CitiBank, FirstBank, or your own bank, which probably has contacts with other banks nationwide.

Deposit checks immediately

Checks in the hand do nothing for your bank balance, so deposit them the same day that you receive them. Ask your bank for 0 to 2 day availability for deposited checks; "availability" is the time from deposit to when you can use the funds as cash, so the shorter, the better. Make sure to meet the bank's deposit deadline for the day, and be aware that the deadline for an ATM machine is often earlier than a teller's window.

I recommend: Use Magnetic Ink Character Recognition (MICR) toner to encode a customer's check with the dollar amount before depositing it. Banks charge you a few cents less for each encoded check, which can add up quickly if you have a high check volume. Starex Financial Systems and The Bankers Exchange both sell new and used check encoders.

Sell only to those who can pay

Not every customer will have the funds on-hand to pay for their purchases, but before letting a customer pay on Tuesday for a hamburger today, make sure they're a good credit risk.

I recommend: The credit bureau Equifax's Small Business Enterprise service lets you evaluate the credit risk of each potential customer. Experian, another credit bureau, offers a similar service called Marketswitch Optimization.

Pay on the deadline

While you should encourage customers to pay immediately, you should pay your own bills only on the day they're due to keep funds in your account longer.

I recommend: Open a remote disbursement checking account at a bank in a tiny town out of state and pay your bills only from this account. (Companies that issue refund checks use this practice.) Checks from this account will typically be cashed — and your funds made available to others — more slowly than checks from a big city bank. Banks that advertise remote disbursement include Republic Bank & Trust and Royal Oaks Bank.

Tips & Tactics
Helpful advice for making the most of this Guide

Offer customers a small discount if they pay in cash or pay early.
Call customers who are late with their payments one day after the bill's due date.
If a customer hasn't paid an outstanding bill, send no more merchandise to him or her until the bill is settled.
Pay business expenses with a credit card. As long as you don't maintain a balance, you won't pay extra and you'll have 30-45 days between purchasing and paying.
Don't leave extra funds in a checking account since they usually pay little or no interest.
Manage your inventory to keep it moving. Inventory on the shelves is wasted cash; better to discount goods and sell them than not see the cash for weeks or months.

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