Cash Management Strategies for Small Businesses

Cash management can be one of the most important practices in your business. Having capital on hand, at the right moment, is vital to keeping your company healthy and your employees and vendors happy. Below are some tips for effectively managing your cash situation.

Request credit terms

            For a new business owner, you may not know that you have the ability to request payment terms from your vendors. The vendor will usually request that you fill out a credit application and will decide if they are comfortable providing credit terms. Don’t feel bad if they don’t approve your application or if they give you a low credit amount, you have to take into consideration this is a business too and they have to weigh the risk of lending credit to a complete stranger. The most common payment term that I’ve seen is net 30, meaning that you have 30 days to get the vendor your payment. Other vendors may offer you 2-10, net 30, meaning if you pay within 10 days of the invoice date you can take a discount of 2% off of your invoice total. This is a cash management practice on their end where they’ve concluded that giving you a 2% discount is worth it since they get your cash sooner.

            Bottom line is don’t feel awkward asking for credit terms, it’s common business practice and the worst they can say is no. If they do say yes though, you are able to defer the cash leaving your account for another 30 days, or whatever is negotiated, which can help you with things like having enough cash on hand to pay payroll when it is due.

 

Credit Cards

A simple way for small businesses to manage their cash flows is to open a credit card for their company. This may make you wince to hear me suggest this because it’s known how dangerous credit cards can be, but let me explain how they can be used in a beneficial and less risky way.

            Cash flow can be tight for any business and managing it is a priority, especially in a small business. Having cash to cover payroll, supplies, or projects is paramount to your business’s success. What a credit card can do for you is extend the amount of time you can hold on to your cash. For example, say you are a general contractor and you need to pay a plumber, but you also have payroll right around the corner. In this scenario imagine you could pay both, but doing so would leave your cash account at a dangerous level. We are going to say in this scenario also, that you do not have credit terms with the plumber and you have to pay on receipt of the invoice. If you decide to pay the plumber by credit card you are essentially pushing the cash part of your transaction to a later date. Depending on your credit card provider this could be 30 to 45 days into the future, meaning this method would defer your cash payment for an extended amount of time and allow you to replenish your bank account from your revenue generating activities before the credit card bill comes due.

            Be careful though, the risks of a credit card still apply. If you know that you will not have the appropriate amount of cash to pay the credit card off when the bill comes due, then you might need to rethink your strategy. You need to weigh the factors of having to pay a high interest rate to what the risks are for you to continue to operate with a low amount of cash. An additional factor to keep in mind is that many small businesses are starting to charge a fee, usually 3%, to use your credit card for payment. This is because the credit card company charges your vendor a fee to process credit card payments and they can add up quickly. It doesn’t sound like a lot, but when you consider a $20,000 invoice, that is $600!

            There are a lot of factors to consider when adding a credit card to your cash management practices, but if used correctly they can bring untold benefits to your company, from deferring cash payments, to the points you can acquire on credit card purchases, it’s worth a look.

 

Taking the time to schedule your payments.

            I don’t want you to get the wrong impression on what I am about to say, but knowing your vendors and using your relationships can play a large effect on how long you can hold onto your money. Many companies, such as your utilities company, have grace periods. Don’t feel bad for using this grace period. You should always strive to pay your bills on time to maintain a good working relationship with your vendors, but sometimes money is tight and we could all use some grace.

            Other times you may realize that a business, say someone huge like Lowe’s, gives leniency on payments that small companies don’t. $600 is nothing to Lowe’s, but could be the matter of making payroll for your plumber. Always weigh your relationships and make sure to do good by your vendors. Do not take advantage of them, but keep in mind their situation.

 

Receiving your payments on time.

If cash flow is detrimental to your company and you’re just starting out then consider “due upon receipt” terms for all of your customers. This tells the customer that when they get their bill and the service has been completed or the product has arrived, they owe you at that moment. Don’t pester your clients, but you can use a soft touch to remind them that their payments are due. Additionally, don’t let your customers take advantage of you. If you have “due upon receipt” terms with a customer and you’ve let them request 2 more additional orders out of the goodness of your heart before payment was received for the first, don’t be afraid to tell them that they won’t receive their additional orders until the first invoice has been paid.

 

There are numerous ways to manage your cash, but I feel this is a great start for a small business. I hope this helps and please remember to contact Terrell Accounting Services, LLC for all of your accounting questions. Based in Yulee, FL and servicing the Amelia Island and Nassau county areas, as well as Jacksonville FL we would love to hear from you and gain your business.

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