As an entrepreneur, it is an essential money step that you have a business cash management policy in place.
What is Business Cash Management?
Managing cash, better known as cash flow management (although the technical cash flow statement in accounting and tax circles is something else again!), is a challenge for many entrepreneurs of all types and with varying experience. It is truly an area that can be quite problematic.
If you can’t have the amount of ready cash available to pay your current expenses and obligations – you will go out-of-business; many businesses have for just this reason.
Not having enough cash in your business is usually due to:
- not billing your clients in a timely manner
- disregarding collection of outstanding client invoices
- you don’t know what your cash position is at any point in time
- your business spending is over what you are bringing into the business
- the terms for your vendor invoices are too short or inadequate.
The Benefits of a Business Cash Management Policy
The benefit is in the reality that if you don’t want to run out of cash to pay your current obligations to suppliers, employees and others, you must have a cash management strategy in place.
When there is a lack of ready cash when you need it, is often the result of these specific business money behaviours when you:
- don’t have proper billing practices in place
- have not managed your billing cycle properly
- are not taking retainers
- start letting your clients tell you how to run your business if don’t bill when it makes sense for your business
- are not billing progressively through each stage of your work performance process
- don’t have good vendor terms in place, that work for your business
What this says is that you don’t understand how to have effective business cash management in place.
Establishing a Business Cash Management Policy
There are many business practices that can be put into place in order to prevent cash flow shortages that may include:
Deposits and retainers
You need to collect deposits and retainers before you begin client work two reasons. If you ask for partial payment upfront and the potential client is serious about engaging your business, they will agree to this. This will show good faith on their part AND you will have that money to work with while you are fulfilling your work for the client. Also, if you have a retainer, then you can draw on that amount, should they not honour payment of your invoice.
Depending on the type of business that you have, you should bill them at various stages of their completion. If you have a longer contract and/or extensive amount of goods/services to be delivered to your client, then bill progressively. Often a 30%, 30% and then 40% billing percentage works well over the course of the contract. The guiding rule is to never leave all of the payment to be made at the end. The reason is you are taking all of the risks of carrying the costs associated with contract. Also, you run the second risk of the client not paying you. It is best if this is stated in your work agreement or contract with the client beforehand.
Don’t let your work and time get the better of you! Always make time to bill at the appropriate intervals or instruct your assistant to do so. Often if you wait too long, clients can forget the amount of time that you have spent on with them. They also may not remember the other “incidental” costs that you may have incurred during the fulfillment of their work. It is much more difficult to justify all of this when the work has been completed.
Never allow client invoices to accumulate. A better strategy is to collect promptly when they have been billed. If they do not pay, then you should put a halt to their work. If clients know their work will not commence until they pay their obligations, then you are sending a clear message about how your company operates and the standard to which they are being held to. It also reinforces the integrity of your business and principles that you expect all clients to adhere to.
Paying Your Vendors
You should never late pay your vendors and suppliers. A a better compromise would be to pay as close to the due date as possible. This will allow you to free-up cash and have it available for investment back into the business or for other buying requirements.
As a final note . . . watch your business cash through having consistent policies in place!
Let us help you to put these policies in place – See Here