This statement might sound like a duh moment, but a business’s growth requires positive cash flow. It’s no surprise that businesses, especially small start-ups, have cash flow log jams on occasion. These cash flow stop ups can be caused by businesses that put their proverbial eggs in one basket by making a sizable sale to a large company. While that is fantastic on the surface, these types of deals typically take 120 days or more to pay the invoice. Four months is a long time to go without paying bills or, even worse, employees.
Other issues that can jam up cash flow are slow payments on accounts, extending too much time for customers to pay invoices, or not a large enough credit line. Here are four ways you can avoid a cash flow log jam.
Set Reasonable Payment Terms
As the business owner, you set all the terms when it comes to accounts receivable. You can handle the cash flow issue in many ways when it comes to payment terms. They are:
- Require payment in full upfront
- Require partial payment upfront
- Set shorter payment time limits
- Require weekly payments
While you should be customer-focused when you establish your business practices, you also have to keep in mind that you have bills to pay, daily operations to keep running, and employees (or yourself) to pay. You have to find a balance of what the customer needs versus what your business needs. Choose the payment terms that best serve your business first. If you get into a cash flow log jam, you could go out of business. Then your customer loses also.
Form an Excellent Bank Relationship
The bank your business uses will be the most critical business relationship you have outside of investors. Setting yourself up to have a healthy and positive relationship with your banking institution can be extremely useful for your business cash flow. You can:
- Establish higher credit limits
- Establish multiple lines of credit
- Establish longer payment terms
- Establish overdraft protection
The most crucial aspect of the banking relationship is that it be established and healthy before you have cash flow issues rather than a scramble to work through problems after the fact.
Communicate with the Customer
Once a purchase order is issued, it is typically too late to communicate needs and get any payment expedition. If your business is having cash flow issues, make sure this is communicated to the customer at the purchase time. While you don’t have to go into detail, you can find a way to explain to the purchaser what your needs are, even if they are outside the standard terms the customer is used to or is established in your business.
If you are upfront with your customer, most will agree to quicker terms. You can also consider temporarily changing your payment policy or terms to get through the cash flow log jam.
Understand Your Customer’s Payment System
Understanding your customer’s accounts payable system will ensure you know when and how much you will be paid. Smaller businesses may be more flexible to expedite payment outside of their established system. Simultaneously, larger companies may have less flexibility if there are more working parts when it comes to accounts payable. In some cases, there are processes and approvals required, and the interruption of the process can be too disruptive to the system. It is crucial that you speak with the company before the purchase or quickly after a cash flow issue is discovered.
Conclusion
Most businesses don’t get off scot-free from having cash flow log jams. There are many reasons they happen, some in your control, and many that are not. Most importantly, it would help if you handled those cash flow jams to get the flow open before the damage is irreversible.
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