Effectively managing cash flow is crucial for business success. If business owners don’t pay their expenses when they come due, it can create poor relationships with vendors and suppliers, low employee morale, even late fees or tax penalties. In extreme circumstances, cash flow issues can cause a profitable company to go out of business completely.
To help business owners better predict cash flow and avoid cash shortages, Kevin Wood, Managing Director at Chesapeake Bank’s Cash Flow division shares his insights. (Kevin also explains the fundamentals of cash flow management, key terms and best practices on the Chesapeake Bank blog.)
How can a small business owner project cash flow?
The business cycle is somewhat unpredictable for most companies; business owners don’t always know exactly when they will finish — or bill — a job. Once jobs are completed, business owners must get an accurate invoice out as soon as possible.
Then, often they play the waiting game on how quickly their customers will provide payment. Receiving payment within 30 days used to be the norm. However, nowadays receiving payment in 60 days, 120 days, or even longer has become standard practice, especially among larger companies.
Business owners must pay close attention to their financials, not just the work they do, to better project cash flow. Cash flow projections will be more accurate when business owners have guidelines and processes in place to prevent late or disputed payments. It’s important to be clear with customers about when you expect to receive payment and ensure your billing practices are quick and accurate.
How can a business owner avoid cash shortages?
To avoid cash shortages, business owners should:
- Be clear about payment due dates to ensure payments are received on time.
- Follow up shortly before the agreed-upon pay date to confirm there are no problems with payment.
- Establish a process for handling invoices that are not paid or are paid late.
- Consider requiring an up-front deposit on work.
While some companies institute discounts for quick payments or late fee penalties, neither of those methods have much success in prompting full payment in a timely manner.
Is Chesapeake Bank’s Cash Flow program right for my business?
Cash Flow at Chesapeake Bank is a program that purchases or lends against a business’ account receivables (invoices) and inventory. The Cash Flow program provides immediate cash (usually same day) to enable a business to run more efficiently. Growing companies, companies that work with slower paying companies, those that need to shorten cash conversion cycles or have challenged balance sheets are the best fit to use Cash Flow.