Keep That Cash Flowing: Ace Your Cash Management Processes
When you’re a small business, cash flow is king and ensuring you have complete control over the cash entering and exiting your business is the key to success. Here are our favorite tips and tricks on managing both your accounts payable and accounts receivable.
MANAGING ACCOUNTS PAYABLE
Accounts payable are, simply put, the money you owe someone else. Whenever you are working with a variety of vendors, it can be difficult to keep up with whom you owe what. If you allow this to turn into a passively managed administrative task, your relationships with these suppliers can suffer. It can also mean that you spend more time than necessary paying. Here are some tips to help you streamline the process.
1 - MANAGE ACCOUNTS PAYABLE ON A DAILY BASIS
Even with software like QuickBooks, the data entry doesn’t do itself. If you’re the type to set bills and receipts aside until you have time to do them, consider moving it to a process that is more actively managed. Entering a few lines of expenses or a new invoice at the end of the day when you’re closing up shop can save you hours of trying to remember what you bought and when.
2 - CREATE CONSISTENCY
You should establish a basic accounting workflow whether it is for yourself or someone else. This ensures that everyone who invoices you is entered into your accounting system the same way and can expect a certain level of service. Once you start a new vendor relationship, ensure that you have a W-9 on file for them and that checks are always issued from original invoices. If for some reason you have a copy, or amended invoice, those invoice numbers and dollar amounts should follow each other such that you pay what is owed, but can also track what a vendor says is owed. In addition to what is entered into the accounting software, maintain paper copies or scans of invoices so that you have a record on hand to go back to.
3- BREAK DOWN EXPENSES ON A REGULAR BASIS
Another part of actively managing vendor relationships is understanding cash flow at a deeper level. Are you taking advantage of any discounts offered by vendors? Are you consistently late on certain relationships? Are vendors constantly late providing you with invoices? Adding a qualitative layer to your cash management can ensure that you aren’t wasting money.
Look for ways to get a better deal on services, either by asking for a discount outright or looking for competitors that may be cheaper. Breaking out your expenses on a quarterly basis can help you plan ahead and make sure that you don’t fall into the trap of passively paying for something you no longer need.
4 - GET TWO SIGNATURES
This may be a little harder if you’re a one-man show, but it is worthwhile to have multiple eyes on a balance sheet before doing a check run. Keeping the number of check runs to two per month can make things easier to track for both you and anyone helping. If you’re taking in invoices, tracking expenses and then writing checks, it’s much more likely that you’ll make an error. Software can help guard against that by creating audit trails and helping with the math.
Consider also employing a CPA at least on a quarterly basis to give the books a once over, almost like a shadow audit. Many larger enterprises maintain shadow audits, and it is worth the cost to do so for small businesses as well.
MANAGING ACCOUNTS RECEIVABLE
Accounts receivable are, simply put, the money someone owes you. It’s about accessing the cash you’ve earned. It’s not always the easiest of processes, but it’s one of the most important. Here are our favorite tips on managing open invoices.
1 - GET ORGANIZED
If you are going to excel at accounts receivable management, you have to start from the very beginning. Be diligent in every step of the process but, most importantly, in whom you decide to extend credit. Net terms aren’t for everyone. Start by setting up a professional credit application that gives you a chance to get as much info as you can on these customers. Use this info to vet them so you are making informed credit decisions. Once you’ve decided to move forward on credit with a customer, be sure you have a contract that clearly states the terms you are operating on and that the customer knows when they must pay you. Also, be sure you are using top-notch invoicing software so you have an excellent way to keep an eye on your accounts and get your invoices to customers as seamlessly as possible.
2 - WATCH YOUR LANGUAGE
When it comes to invoices, the wording you choose to include can affect the time frame in which you receive the check. For example, by including a “please” or “thank you”, you can increase your chances of getting paid. If you avoid jargon such as “net terms” and be more specific with a phrase like “14 days to pay”, you’ll also get paid faster.
3 - START EARLY
Don’t just wait for the customer to pay. Create a system that allows you to remind customers when they have a payment around the corner. If it is a week before payment is due, and you still haven’t received the check, send the customer a friendly reminder email simply reiterating the due date and how you accept payment.
4 - REMIND, REMIND, REMIND
This seems silly, but your customers might not know their payment is late if you don’t tell them. Believe it or not, some of them haven’t paid because they just simply forgot. It’s your job to make sure this isn’t the case. As soon as the payment is past due, get a reminder letter in the mail. However, don’t just use a generic letter. Be crafty and sculpt the letter’s language to be appropriate for the situation. If somebody is a chronic late payer, you might want to step up the severity; whereas if it’s someone’s first time, keep it friendly.
5 - COLLECTION CALL
After you have sent the letter and have received nothing, it’s time to get on the phone with the customer. You must not let your emotions get the best of you and you cannot let the customer run the conversation. You need to prepare for the call and be ready to accomplish your goal. To do this, follow these tactics:
- • Be specific
- • Be positive
- • Be professional
- • Be in control
- • ...But be flexible
- • Be committed to finding a solution
6 - PREPARE FOR EXCUSES
The hardest part of the collection call is listening to the customer’s different excuses for not paying. No matter what, you have to be prepared to battle these. Although (in some cases) it is easy to sympathize, accounts receivable management is about action and you must require some from the customer. Get acquainted with the most common late payment excuses and learn how to respond to each one. Practice makes perfect and helps you get paid.
7 - INSTALLMENT PLANS
When you do come across a customer who seems to be experiencing a financial hardship and you really would like to help them out, installment plans are key. Having a customer pay you back in smaller amounts over time is MUCH better than a customer not paying you back at all. It gets cash in your pocket immediately and says a lot to the customer. Work with the customer to create a payment plan that works for both of you. Ideally, it would be great to always receive all of your money up front, but in those moments you can’t, be creative in how you can help the customer pay you.
8 - FINANCE CHARGES AND REWARDS
Incentives go a long way, no matter what you are doing. Consider this when it comes to accounts receivable management. Are you adding finance charges for late payments? Are you giving customers a discount if they pay early? Whether it is to have consequences for paying late or rewards for paying early, give customers a little push to get that cash to you on time (or early). It’s worth it, especially to see what kind of effect it has on your payments. If you are considering adding a finance charge, check your state’s usury laws to make sure you are not overcharging.
9 - OUTSIDE RESOURCES
You still need to know when to turn for help. There are many things you can do to help with late payments or delinquent accounts. Consider reporting late payments to the credit bureaus, which will affect those customers’ credit scores. Knowing you are reporting will certainly motivate them to pay next time. If you have particularly large or repeatedly delinquent accounts, consider calling a debt collection lawyer to help take legal action. And if you need cash fast, look into receivables factoring, which will help you get your hands on cash while a factor pursues your late payment.