Five Tips for Improving Cash Flow

Do you find yourself struggling to juggle bills or negotiating for early payments from customers? To improve cash flow and save some time and money, try these five, sure-fire tips:

Tip #1: Invoice Often and Quickly

Perhaps the easiest thing to start doing is to quickly invoice your customers. Invoicing more swiftly not only means that you get paid more speedily, but invoicing as soon as you've shipped a product or provided a service often means you collect more money.

For services, for example, you'll typically find it easier to bill more for a service if the customer or client still remembers all the details of your service. Wait a few weeks, however, and the customer may have forgotten about the extra work you did or the special service you provided.

Tip #2: Ask for Deposits

Especially if you're working with new customers, consider getting an upfront deposit before starting any work, shipping product or investing time. Deposits deliver several cash flow benefits. Aside from the obvious benefit of upfront cash, deposits also tend to reduce your bad debts — if only because they force you to discuss pricing and costs in the beginning. Finally, deposits tend to scare away bad clients and customers — the kind of people who only hurt your cash flow in the long run anyway.

Tip #3: Fire Bad Customers, Vendors and Employees

Almost surely, you've got unprofitable customers, vendors and employees. By firing these people, you will improve your cash flow in the long and short run.

Tip #4: Reconcile Your Bank Accounts and Implement Other Internal Controls

You might be surprised to hear that small businesses are regular victims of employee, customer and vendor theft. You can't really stop people from attempting to steal from you. But you can implement tactics that help you spot any unscrupulous activity earlier and make their theft more difficult to accomplish.

One of the most important things you should do is reconcile your bank account. With accounting software programs and online banking, the process shouldn't take more than about 30 minutes a month in many cases. If you resell inventory, you may also want to reconcile regularly your accounting records for your most valuable inventory items with actual physical counts.

Tip #5: Make Sure Products and Services Are Really Profitable

As a general rule, small businesses deliver high rates of return on the owner capital invested in the business — about 40 percent on average. When you stop to think about it, that means that a small business that's working right should be generating plenty of cash flow. Enough cash to pay vendors, employees, banks and — yes, even you, the owner!

Of course, even a healthy business sees its cash flow ebb and flow. But if you're chronically challenged by your business cash flow, maybe you don't have a cash flow problem. Rather, your cash flow issues may be symptomatic of inadequate profit on the products and services you sell.

In this case, you may need to re-engineer your business model so it's more profitable. Once your business does become more profitable, you should find your cash flow troubles disappearing.

Small-business CPA Stephen L. Nelson is the author of QuickBooks for Dummies. He also edits the popular Web sites www.llcsexplained.com and www.scorporationsexplained.com.