Page 137 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes 3. An important concept in understanding the income statement is ………………………..
4. Cash Flow Analysis is useful for ……………….. planning.

9.2 Managing Cash Flows

Maintaining a healthy cash flow is one of the most important aspects of running any small
business. Key to success in this area is the management of inflows and outflows, which can be
monitored using a financial software package.

9.2.1 Analyzing Cash Flow

Before you can begin to improve your cash flow management, you should obtain a detailed
view of how your company manages cash. Look at areas including accounts receivable, accounts
payable, credit terms and inventory.

If you find that there is an imbalance between money coming in and money going out – for
example, if you have more unpaid purchases than sales coming due - this may result in a cash
flow problem during the next month.
Once you have analyzed cash flow, you can begin to look for ways to improve cash flow
management. In very basic terms, your goal is to speed up inflows and delay outflows as long
as possible while still meeting all of your financial obligations.

9.2.2 Improving Accounts Receivable

Accounts receivable make up a large proportion of the cash coming into a small business, so
keeping a close eye on them is vital to improve cash flow. Collecting money may not always be
easy, but there are steps you can take to ensure you don’t find yourself with a cash flow crisis due
to slow payments.
Stay on top of payments: Awareness of when customers’ payments are coming due is very
important and you can use your financial software to stay ahead of the game. Generating an
accounts receivable aging report to track the habits of your customers over time will help
identify which ones are likely to need to be prompted to pay.
Make it easy for them to pay: Similarly, make sure you have been prompt in your issuing of
invoices. If customers regularly receive their invoices in a timely manner, you are more likely
to receive your money quickly. Ensure that customers know exactly when payment is due by
indicating it clearly on the invoice. Give them easy and fast options for payments, such as fax
and online methods. Many owners have successfully accelerated accounts receivable collections
by offering discounts to those who pay early.
Institute a credit policy: When and how do you make credit decisions about your customers?
The sooner you do so, the faster you can bill them – and the faster you will get paid. Try to
anticipate customers’ credit needs before they ask.

For new customers, you will probably want to require a credit check and several references, a
process which can be initiated ahead of their first order to speed things up. You could also
consider asking for a small deposit on new orders, to make sure you have some cash on hand.

Institute a collections policy: Your policy should indicate when you begin efforts to collect on
a payment. Many business owners stick to a formal reminder system that takes on a more
serious tone as the lateness increases and eventually involves an attorney and, ultimately, a
collection agency.

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