Tips on Managing the Cash Flow of Your Business

Businesses fail every day in the US. Often, they are new startups who do not have enough finance to keep trading, but sometimes they are companies doing very well. It is just that expansion can happen very quickly and then the business can become short of money and not be able to pay its bills. Managing cash flow is important from day one of any business and should continue as long as the venture is running. If money is not managed properly, problems will arise. Here are a few tips to lower the risk of it happening to you.

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Invoice Factoring to Control Credit

If you sell goods or services to other businesses, you may well find that they take a while to pay. Most businesses expect 30 days of credit at least. In reality, they usually take 30 days from the end of a month. This means that if you sell to them on say the 7th of a month, it could be seven weeks before you get paid, assuming they pay on time. You could still have weekly bills to meet, such as your payroll, and this can cause huge cash flow problems.

This is where the benefits of invoice factoring are useful as at the end of each month you will be paid for all your invoices. The factoring company then collects the debts from your debtors as and when they are due. Factoring companies do, of course, charge a small fee for this service., but it is often less than you would pay for any other form of borrowing and saves you the embarrassment of not being able to pay your employee wages.

Overdrafts

Overdrafts can give you some leeway with your cash flow, but once you have reached the limit you are in the same position as before you had it. If an overdraft is the way you want to go, you must ensure that you ask for a higher limit than you think you will need to help prevent this from happening. Too often, a business owner requests a limit that will get them out of a current bad situation, pays all the bills and then needs more money.

Banks will expect accounts and cash flow forecasts before they grant an overdraft, but the advantage of them is that you will be charged interest just on the amount you use. If money is coming in and out all the time, this can be cost-effective. However, go over your limit and you will incur extra charges.

Creditors

You could talk to your creditors to see if they will give you extra time to pay. They will not want to lose your business and might be happy to give you the times it takes for your cash to come in. You will find that some will do this, where others will want you to pay strictly within their terms of credit. If you are able to buy some extra time, you should make every effort to stick to what you have agreed to. Then they will be far more likely to help you again in the future if the need arises.

Every year, about 50% of new businesses in the US fail because of finances. It is often not because they are unprofitable, but because cash flow gets out of hand. Do not let this happen to your venture. Anticipate the problem and do something about it before it happens.