Small Business Taxes & Management

Special Report

16 Ways to Improve Your Cash Flow


Small Business Taxes & ManagementTM--Copyright 2013, A/N Group, Inc.


Most small businesses are perennially starved for cash. Even if profits are very good, cash is needed to purchase more equipment, do more advertising, stock more inventory, etc. While there's no universal solution, there are a number of steps you can take, and many are common to most small businesses.

Do a Cash Budget. You can't know where you're going unless you budget. Part of improving your cash position is having a handle on where the money coming from, where it's going and when it's going to be needed. No sense spending the money on an advertising campaign if you can't afford the inventory to support it or the equipment to make the product. For more information, go to Cash Flow Budget.

To Do List. That big order you just got paid on isn't all yours. In 25 days you'll have to pay 7% to the state for sales tax. Keep a running list of when significant dollar outlays are due. That's particularly true for items that aren't paid monthly such as real estate taxes, insurance payments, etc. That can allow you to hold off a payment till the last minute. A to do list and a cash budget go hand in hand. If you're doing a cash budget the to do list should be easy.

Repair vs. Replace. That machine won't last forever, but if you can get another two years out of it with some modest cost repairs, it may make sense to hold back on a new one. You've got to evaluate your options here. If a new machine will lower costs or produce more and repairing the old will be relatively expensive, replace is probably the way to go. Just don't automatically buy new when you can repair. And don't be afraid to buy used. A used computer probably isn't a smart choice; used office furniture can be if it was good to begin with.

Lease vs. Buy. Equipment leasing can be expensive because the imputed interest rate is often high. But it can conserve cash, particularly if you'll have problems getting a loan for the equipment. You've got to explore your options here. Some equipment can be relatively cheaper to lease then others. Some leases are based on usage. For example, big copier/printers are often leased with a fixed and variable charge. If your usage is relatively low you may be better off with a lease. Check the contract carefully.

Credit Analysis on Customers. Before advancing credit, make sure the customer can pay. More than one business has gone under because a major customer couldn't pay. The pain can vary. If you're marking up product by 70% you can usually afford some loses; if your gross margin is only 15%, you've got little leeway. Get credit reports on your customers from Dun and Bradstreet or one of the other rating agencies. For old customers watch for warning signs--slow paying, disputing amounts, etc. Advance credit to new customers slowly. You can't watch every account so make a list of the larger ones and watch them carefully.

Accounting Software. There's more than one accounting package for small businesses and most are about as easy or difficult to use. Using computer software your information can be more up-to-date (assuming you update your information daily or at least weekly) and you can set warning flags. For example, if you enter your open sales in the accounts receivable package you can quickly see who's behind in payments and by how much. You can see where inventory is piling up--or low. You can't analyze your business without information. Even if you have a handle on your business when it's small, you'll lose that ability as it grows.

Inventory Control. If you're a manufacturer, or even a restaurant, bake shop, etc. keeping inventory to a minimum can help conserve cash. Of course, you've got to balance that with out-of-stock costs. Keeping good records will make controlling inventory much easier. Even service businesses have inventory--spare parts, replacement tools, etc.--and, of course, office supplies. If you have an emergency local supplier you can get closer to the edge. Balance volume discounts with the cost of carrying extra inventory.

Drop Ship. If you're a distributor or retailer and have to place a customer order with your supplier, see if it can be drop shipped. It'll get to the customer faster and cheaper. Works best for quantity orders. It can also reduce the amount of inventory you have to maintain.

Daily Deposits. Get that payment in the bank as soon as possible. There are two reasons, the first is cash flow, the second to prevent embezzlement losses. If you get payment through the mail, consider a post office box which can save a day on mail delivery (don't use this approach if you don't check the box daily). A lock box service (the check is mailed to a post office box operated by a bank) may work for some businesses. Checks may get credited quicker, but it'll cost you. For most smaller businesses scanning the check using a smart phone or a bank provided scanner may be the best approach. Again, check costs. Taking credit cards involves several tradeoffs.

Ship Quickly. The quicker you ship, the quicker you can bill so get product out the door as quickly as possible. If you're not charging for shipping based on your actual cost (e.g., you charge a flat amount based on the sale) ship based on value of product. That is, a very high valued product is shipped next day; others get cheaper service. Make sure the order is correct. A mix-up will definitely delay payment, not to mention generating ill will.

Bill Quickly. Now that you shipped it, follow up with an invoice. If you mail the invoice, do so at the same time as shipping product. Don't wait till the end of the week to send invoices, do it daily. E-mailing a PDF can save additional time and avoid the "it got lost in the mail" excuse. On a long-term contract, (e.g., consulting work) consider drafting the contract to bill bi-weekly instead of monthly. If you're getting progress payments, bill as soon after meeting the milestone as possible. Again, using accounting software should make this quick and painless.

Discounts for Prompt Payment. If you allow customers to pay by the end of the month, 30 days, etc., consider offering a discount for early payment. Terms such as 1/10 days, net 30 won't cost much and may not only secure early payment, but entice customers with cash flow problems to pay you first. But some terms 2/10, net 30 can get costly. For more information, see our article Vendor Discounts for Early Payment.

Past Due Accounts. Again, good accounting software can help. The first step is knowing when a customer is past due. Follow up as soon as possible. The older an account gets the worse your chances of collecting anything. Larger accounts demand more attention. Customers who are always late are usually the greatest risk. Making that phone call can be difficult. If you have salesmen let them do it; they'll have an excuse for calling. Getting put off generally portends bad news. Set an alarm to follow up if payment isn't received when promised.

Supplier Terms. Talk to your suppliers about getting better terms. You may have grown and buy more, have an excellent credit rating, always pay on time, etc. Your supplier is unlikely to offer a better deal on his own. Why should he bother? Just asking may get you a better deal. If he balks, be ready to sell yourself. You may be able to get either a better price or more time to pay. You've got a better chance if you can show you're growing, he's got competition for your business, etc.

Delay Payment. We're not talking late, just at the last minute. That's particularly smart if you're not getting a discount for early payment. Taking an offered discount often makes sense, but check the numbers. (See the link above.) If you're financing the business with your credit card, the discount could be costly.

Selling Receivables. You can get cash quicker by selling your receivables, but this often isn't cheap and will require additional paperwork. Get good advice before committing.

Don't forget that for most small businesses, your personal finances are almost as important as the business. More than once we've heard "this business is bleeding cash" only to learn the owner is taking out $3,000 a month for luxury car leases for himself, his wife, and daughter.


Copyright 2013 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536

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--Last Update 11/01/13