Smarter Invoicing Practices Can Improve Cash Flow

One of the top reasons a startup goes belly up is lack of cash flow – or specifically, the money runs out. Even for established businesses, cash flow problems are an ongoing headache for many and can cause a small business to fail.

Cash flow problems occur when a business spends more money than it earns. A surplus of cash every year is essential for a business to be viable in the long run because it’s impossible to grow a business without profitability and strong cash flow. Cash flow is generated when a business sells goods or services for cash and collects payments from customers.

If you can’t pay your company’s bills and expenses you may be forced to make late payments on things like utilities and rent or take out additional loans. Late payments can also negatively affect the business’s credit rating and the ability to secure loans in the future.

But the process of “money coming in and money going out” doesn’t need to be your nemesis.  Here are a few simple strategies for identifying cash flow gaps, preventing them, seeking outside advice if needed, incentivizing clients to pay on time, and automating your invoicing processes. All of them will ensure smarted invoicing in your business flow.

Identifying Cash Flow Gaps

The cash gap is the number of days between the date when a company pays cash out for the inventory it purchases and the date it receives cash from customers for the same inventory. In other words:

“Inventory days on hand + receivables collection period – accounts payable period = the cash gap.”

As the business owner, you are responsible for covering the “gap” or difference. It would be nice to have cash reserves on hand to cover expenses, but most of the time people get a bank loan to close the gap. This can be risky and expensive over time.

The Firm of the Future team at Intuit say there several signs that may indicate cash flow issues:

  • The growing stack of overdue invoices sitting on your desk could signify a problem.
  • The price of doing business is going up: rent, internet, supplies, etc.
  • Sales are slowing down. Maybe you’ve lost some clients or your business is seasonal in nature. Whatever the reason, these are clues of a potential cash shortage.
  • The buildup of excessive short-term debt, like credit cards, can also present cash flow problems. If you’re constantly borrowing from Peter to pay Paul, it may be time to look more closely at your cash flow.

Preventing Cash Flow Gaps

Knowing exactly where your cash is going is crucial to avoiding cash flow gaps. Small business owners need to know how much money they owe and how much others owe them by keeping detailed logs of accounts payable and receivable, which can help identify which bills need to be paid now and what expenses can be reduced.

You may have to look at taking out loans if there are no cash reserves or downsizing your staff. In other cases, you need to look at how to reduce expenses or reevaluate your sales and marketing strategy.

Below are a few other considerations.

Reward Clients Who Pay On Time

Chasing down payments is not a fun activity for businesses. Give your clients an incentive to pay on time or at the time of service if your profit margins can handle it. Offer a 1 or 2 percent discount if they pay within 10 days. This may not be doable for every business, but incentivizing your clients may save you the hassle of tracking down your money and prevent lost revenue over time.

Penalize Those Who Don’t

If you don’t already have one, create a standardized client agreement that builds in late fees. A typical fee is 1.5 percent interest per month after the payment due date. For the client, it behooves them to pay on time. Or you can spend time hounding them, which is not time well spent.

Automated Invoices is Smarter Invoicing

There’s an abundance of software on the market for those looking to create their own professionally prepared invoice. Using an online invoice generator will streamline information on each invoice and the client will know exactly what they are paying for.

The client is less likely to delay payment if there’s no mystery surrounding your services. Clients don’t like to be surprised. You can set up recurring billing with your regular clients using an email productivity tool like Boomerang that will send scheduled invoice reminders.

Accept Various Forms of Payment

While cash, checks and credit cards are always welcome forms of payment, they aren’t the only way to pay bills.

Consider other methods of payment including Google Wallet, Apple Pay, PayPal and other competitors. The digital transaction field is rather large, so if you choose a digital payment option, consider what your needs are and pick a service accordingly.

You’ll need to consider the costs associated with maintaining each system. You want to make payment easy and safe for the client and yourself. Ask other people in your industry what types of payment they accept and why.

Do You Need a Financial Advisor?

There are management professionals who may help you run your business successfully: financial advisors and accountants. While financial advisors and accountants may have some overlap in their job descriptions, you can actually expect their education and financial roles to be quite different.  You may already have an accountant who is responsible for daily tracking, organizing and analyzing your books. Accountants make payroll, maintain a budget and pay taxes. Meanwhile, finance pros look at the big picture and manage at the top tier. They help with making strategic decisions on the company’s behalf. Financial advisors have a big influence on the owner of the company.

Conclusion

Poor cash management could end up causing a profitable company to go belly up. Most businesses that have cash flow problems don’t start looking at their financial statements until it’s too much to handle. Part of the strategy for smarter invoicing is checking your invoices regularly, and making notes on their due date.

However, when a business changes its approach to managing their company, some cash flow gaps can be prevented. Keeping your finger on the pulse of your finances is vital. What are your thoughts on closing the gap?

Avery Phillips
Avery T. Phillips is a freelance human being with too much to say. She loves nature and examining human interactions with the world. Comment or tweet her @a_taylorian with any questions or suggestions.
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