When the economy slows, any business owner can be proud to have a list of new drilling jobs lined up in advance. The problem, however, is that strong sales alone are no guarantee of financial health, because the first signs of a weakening economy often appear when payment is due. So while it’s important to watch sales, it’s equally important to keep a close eye on the delicate balance between accounts payable and accounts receivable. The moment accounts receivable begin to lag, this change must be counterbalanced in accounts payable to maintain healthy cash flow. Otherwise, this situation can quickly undermine a business’ financial standing – even when sales are strong.
Today’s economic climate brings with it a number of forces that can conspire to knock a business off its feet financially. For every business, economic concerns mean all customers are watching their money more closely. In addition, nearly every business is feeling the effect of increased oil and fuel prices, whether directly or indirectly. These and other factors potentially add up to fewer customers, customers who pay more slowly, and higher expenses. The net result: cash flow concerns. In fact, while 46 percent of business owners last year said they were experiencing cash flow issues, today, 56 percent say they have cash flow worries, according to American Express OPEN’s Small Business Monitor, a semi-annual survey of business owners.
Regardless of where the economy may take us, the savviest business owners not only will watch sales, but also will shape up their practices in accounts payable and receivable. By keeping in mind the following tips, you can optimize your financial standing for a healthier business.
Get the Most from Your MoneyTo keep your business’ cash flow healthy, hold onto the cash you have as long as possible. One easy way to improve your cash situation through accounts payable practices is to take advantage of credit cards to delay payments. In particular, cards that offer flexible terms are a great way to keep cash flow healthy. A new financing tool from American Express OPEN provides business owners with flexible trade-like terms with the option to defer payment for two months, interest-free, or receive early-payment discounts for just about everything purchased with the new PlumCard. It was designed specifically for businesses that face high upfront costs and risk temporary imbalances in accounts receivable and payable. You can get more information at www.plumcard.com.
Once you’ve worked out a strategy to delay payments as much as possible while still honoring your obligations, you’ll also need to keep down costs. Recurring costs are the real target to aim for. Do what you can to keep payroll as lean as possible. One way to limit payroll costs is to hire temporary help for seasonal peaks or special projects. Also try to keep your inventory of materials and supplies as low as possible, without risking shortages. An overly large inventory needlessly overburdens cash reserves, tying up money you need for other, more pressing expenses.
Offer a Variety of Payment OptionsWith a plan in place to hold onto your cash, you’ll need to turn your attention to collecting payments as quickly as possible. Offering different payment options can help in this effort, but make sure you’re offering the smartest options.
Next to cash, perhaps the easiest and most convenient option is to allow customers to use a variety of charge and credit cards. It’s difficult to beat them when it comes to maintaining healthy accounts receivable. Unlike checks, you won’t run the risk of a customer’s overdrawn account. And no matter how long customers decide to take to pay off debt, you’ll receive cash quickly. Furthermore, customers often like this payment method because they can earn rewards points or accrue other benefits the card may offer.
At the opposite end of the spectrum is the practice of extending credit to customers yourself, beyond the typical terms of 30 days. While there is theoretical potential for a handsome profit, the risks are considerable if you finance the transactions yourself. Not only will you risk never seeing payment in some cases, but customers’ late payment can quickly upset cash flow. The drilling business is challenging enough for most, so think twice about tackling the second trade of lender.
Overhaul Collection ProceduresMost small businesses can improve collections simply by attending to the basics. Take steps to keep all customer information up to date. By maintaining current telephone numbers and address information, you’ll speed collections work and reach customers promptly. When dealing with businesses, be certain your invoice contains all appropriate information, such as your customer’s purchase order number or your vendor number, and be sure to send the invoice to the appropriate contact. Wrong contact information or missing invoice information will only add more time to the collection cycle – and that’s what whittles away at cash reserves.
Outsource Accounts ReceivableBad credit can be contagious, so it’s important to take steps to prevent bad customers from affecting your good credit. Protect yourself from late-payers or non-payers by putting a reputable intermediary in the middle. Hire or assign a reliable bookkeeper or accountant on a contract basis to handle accounts receivable functions. His or her job will be to approve credit, make collection calls, receive payments and make deposits. By taking this active step toward strong accounts receivable, you’ll take a major step toward stronger cash flow. According to the recent Small Business Monitor, a more aggressive approach to collecting accounts receivable is the number-one tactic small business owners are likely to employ to improve cash flow.
Maintaining the delicate balance between accounts payable and receivable isn’t necessarily easy, but with concerted effort and some common sense strategies, you can build a more solid financial foundation for your business. And with more cash on hand and greater peace of mind, you can focus on new and inventive ways to take on whatever the economy may bring.