How can my small business improve cash flow this coming year?

Every year, busy professionals like you running and operating small businesses try to hit the reset button on a number of levels.

One critical item on the minds of most small- to medium-sized business owners is how to improve cash flow. For many, it seems to be an ongoing challenge.

For many small businesses, cash flow problems are not necessarily due to a lack of sales. Negative cash flow results from delayed payments, unclear processes, and inconsistent follow-up on late invoices.

When your accounts receivable systems lack structure, those unpaid invoices slowly accumulate and eventually hurt your business.

The good news is that many cash flow problems can be prevented by implementing the right systems. And as the new year begins, business owners and operators like you have an incredible opportunity to strengthen your accounts receivables process and protect vital cash flow.

Here’s some advice from our professional debt collection team on how to reset your cash flow in the coming year.

Start the year off with a clear picture of cash flow

It may sound obvious, but improving your cash flow starts with understanding where your money is currently tied up. Improving your small business cash flow starts with a few simple steps.

Work with your bookkeeper or CPA to generate a 12-month cash flow statement.

Look ahead to the next 60 or 90 days and try to forecast cash flow.

The next step is to understand the percentage of receivables that are past due in your business.

Here you’ll begin developing a baseline that will help you identify patterns, potential seasonal shortfalls, and recurring payment delays. That can set the tone for proactive action.

Understanding customers by payment habits.

You can get a good understanding of the types of customers you have by looking at how they pay and your bookkeeper or CPA will be able to provide you with this data. You can break customers into categories such as:

People who pay on time.

Customers who occasionally pay late.

Chronically delinquent customers.

This will give you an understanding of just how severe your cash flow problems are and the reasons behind it.

Strengthening payment terms in the new year

One of the more effective strategies is to adjust your payment terms for both new and existing clients. At the very least, you should be reviewing your current payment terms with your bookkeeper or accountant. Clear payment expectations reduce disputes as well as ambiguity, which can lead to those delayed payments.

Some best practices include.

Moving from Net 30 to Net 15 if possible.

Requiring deposits or partial payments for new projects and new customers.

Using milestone payments for longer engagement projects, if that serves your business.

In reviewing payment terms in your contracts, proposals, invoices and statements.

Invoice quickly and on a consistent schedule

The new year is an excellent opportunity to review how and when you invoice your customers. It’s time to review the number of delinquencies and late payments your business has incurred over the past 12 months and adjust your invoicing accordingly.

Late invoices will lead to late payments!

A few basics of invoicing to review at the beginning of the year.

Make sure you’re sending invoices immediately upon completion of service or milestones in serving the customer.

Always use a standardized invoice format with clear due dates and details of service.

Include the payment instructions clearly and prominently on the invoice such as how to pay bike shack, credit card payments or other forms such as your website.

Include contact information for customer questions.

Explore the opportunities to leverage automated invoicing software, which can connect with the debt collection agency you work with.

Review the follow-up process your business uses for late payments

Remember, repeatable systems are far more effective than the, “we’ll get to it when we have time” method. Inconsistent follow-ups on late-paying customers are one of the most common reasons for overdue invoices.

Take the time to not only train staff who are responsible for following up with customers but make sure these happen regularly.

Remember a few essential follow-up procedures:

A friendly reminder before the due date is perfectly acceptable. (Your payment is due in 2 days…)

Sending a past due statement at a convenient time for your business. Typically, five to seven days.

Direct outreach, such as a friendly phone call, during the 15 to 30 days past due mark.

Consider a letter to the customer indicating that further collection activity may be implemented if payment is not received within a defined time frame.

Using a debt collection agency when structured systems don’t produce results

Using a debt collection agency to improve your cash flow is a highly effective strategy that should be implemented year-round. Not just when you see your books in the red.

If you’re spending more than a couple of hours chasing down late-paying customers, then your business is most likely a candidate for partnering with the right collection agency.

You shouldn’t send accounts to collections only when your business is in panic mode. It should be an extension and necessary part of your accounts receivables process.

When you initially meet with a representative of a reputable agency, you want to be equipped with the necessary data such as the amount of outstanding invoices, the age of those delinquencies and also look to the future growth of your business to be prepared to build positive cash flow.