According to Les Masonson, financial services expert and author of Cash, Cash, Cash: The Three Principles of Business Survival and Success, the path to effective, successful cash flow management is a simple one. You can streamline your cash flow to its maximum potential simply by following a few key rules of thumb, such as getting customers to make payments as soon as possible and not paying bills before you absolutely have to.
Quick collection
Small businesses that take several simple steps to streamline the collection process can significantly expedite the time it takes for customers to pay them. For example, ask customers to fax or email their orders to you, and send out your invoices immediately after a shipment goes out rather than setting aside the task for later.
Additionally, apply a little pressure by prominently indicating the due date for payment on the invoice and drawing attention to the penalty interest for lateness. Generally, customers like to wait until the last minute, but if there's one thing they hate more than paying early, it's late fees.
If the customer pays by check, it becomes your responsibility to get the money into your account quickly. Masonson recommends always depositing checks on the same day they are received and making sure you're familiar with your bank's availability schedule – how many days it will take before you can use the money deposited by check as cash. From a community bank to a major financial institution, all banks have an availability schedule. What's more, each has its own, so if you open an account with a new institution, don't assume it will take the same amount of time to process checks.
Slow disbursement
Small businesses spend a lot of time chasing after customers for payments. Ironically, when it comes to paying your own bills, the shoe is on the other foot. According to Masonson, you should never make a payment a day sooner than you have to. As with many things in life, there's an exception – some companies give discounts to early payers. In this case, you should take full advantage of that option – provided, of course, that you can cover the expenditure at the time.
There are several ways to slow down your disbursements, including mailing payments toward the end of the week, using business credit cards for eligible expenses and refraining from issuing advances to employees.
Effective collection and disbursement methods can help you increase your "cash runway" – something Entrepreneur magazine defines as "the amount of time or money with which (a small business) can operate in the red."