The Importance of Good Cash Management:
Cash flow is the lifeblood of your start-up businesses. Cash comes from sales, collections of account receivables, and the sale of assets as well as loans and credit lines. On the other hand, cash flows out to meet all expenses and debt obligations of the business. The goal of good cash flow management is to have enough cash on hand at those important times such as when it's time to pay employees. This is a simple concept, yet in practice, it eludes even the biggest operations. So long as more money seems to be coming into the business than going out, many entrepreneurs do not give cash management a second thought. This leaves them vulnerable to a quick and painful death.
Learning good cash flow techniques ensures that the company always has enough cash to meet its obligations. Adequate cash helps obtain whatever funds are required from external sources at the right time, in the right form, and on the best possible terms. A shortage of cash flow could result in the loss of valuable trade discounts or, in extreme circumstances, financial embarrassment and bankruptcy.
Your start-up can increase cash-on-hand in a number of ways:
1. Collecting Receivables: Start-ups can improve their cash position simply by making certain that their billing, collections, and payables systems are operating as efficiently as possible. If this means getting help...then get help any way you can. Small businesses do not have the luxury of large accounting and collection departments of big corporations. More so if you are a home-based entrepreneur working alone. First, get your customers to pay you as soon as possible! To the extent possible, adopt the business practice of requiring up-front deposits when making sales. However, if the account payment is a receivable, then make sure that you actively manage its collection by billing promptly, aggressively following-up on overdue invoices, and quickly collecting on overdue accounts. You stand to lose revenues if your collection policies are not aggressive. The longer your customer's balance goes unpaid, the less likely it is that you will receive the full amount. Then you have to consider hitman alternatives starting with limbs. (Did I say that outloud?) (Legal disclaimer: I was joking.)
2. Tightening Credit Requirements: If you think that you offer the best product or service relative to your competitor, you can obtain the best possible credit conditions. I know this is a tough one for start-ups because you just want to close deals. But, be sure to tell your potential customers upfront about your credit terms - before you provide your product or service. To improve your cash flow position, you can be more stringent in your credit terms, requiring more customers to pay cash for their purchases. This will increase the cash-on-hand and allow you to sleep at night. However, there are trade-offs to tightening credit in the short and in the long run. Looser credit allows more customers the opportunity to purchase your products or services. But, this can lead to spending more time chasing down bad-debt. Another way is to get as much information from the client as you can in the form of a "customer agreement." The more information you have about the customer or client, the easier it is to take their first born in the event the person rescinds on the payment.
3. Short-Term Loans and Credit Lines: Loans from various financial institutions are often necessary for covering short-term cash flow problems. Revolving credit lines and equity loans are types of credit used in this situation. Don't be afraid to use them, with care.
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