Far too many business owners make financial decisions based on their bank account balance. But that figure is constantly in flux. It only represents the funds you have at that moment but not the funds that will soon enter and exit your bank account as you pay your expenses and revenue is received. Instead you should base your decisions on your business’s cash flow – the figure that accounts for the funds you have at the moment, in addition to the funds you will eventually pay and receive.
Bills are easy to handle since it’s up to you as the business owner to pay them before their due dates. But in order to have the necessary funds to pay your expenses, you need your clients to settle their invoices in a reasonable time frame. Collecting your revenue in an efficient and timely manner is the key to maintaining a healthy cash flow.
Here are five tips for getting your invoices paid faster and keeping your cash flow strong:
1. Keep your books accurate and up-to-date
You can never hope to understand your cash flow without well-kept financial records and detailed accounting reports.
Don’t fall behind on your accounting and bookkeeping responsibilities. The more effort you put into keeping and analyzing your books, the stronger your understanding of your business’s finances will be. You should strive to know your books so well that a quick review of them will give you an understanding of your cash flow.
2. Send firm and friendly reminders
When sending invoice reminders, be direct and fair without being a pushover. A firm yet friendly follow-up strategy usually gets the customer to do their part and pay the invoice. If not, you can take more formal action.
You can keep track of what you’re owed by always monitoring your accounts receivable turnover. If it’s trending up, it’s likely time to send reminders to your clients with open invoices. As receivables age, their quality goes down, so it’s best to act sooner rather than later.
3. Keep your accounting simple
If you’re struggling with record keeping, get accounting software that makes the task easier and consider hiring a professional to help you use it. A reliable accounting system combined with the knowledge and experience of an expert bookkeeper will help you track and report on key business metrics, including your cash flow.
4. Keep your business and personal finances separate
All your business funds should move in and out of a dedicated business bank account. Mixing your business and personal finances makes it very difficult to assess your business’s performance..
5. Set aside a cash reserve
One of the best ways to stay on top of your cash flow is to keep a surplus of cash on hand.
Your reserve can help you weather unexpected situations that come up in the course of running your business. It can also give you more confidence when it comes time for your business to take the next step because you’ll know you have the extra financial cushion available.
The saying “cash flow is king” might be trite but it certainly is true. Following the five rules above will help ensure that your cash serves you – rather than the other way around.