The importance of the cash flow metric in a business cannot be overstated. As CPA’s, we notice many of our business owners pride themselves on the profits they have attained. But they have little to show for it in the cash department.
There is a distinct difference between cash flow and profits. Both metrics are vital to the health of a business. But cash flow ensures that a business is able pay its bills and staff, keeping the business operational.
Discussion and analysis of cash flow problems can take time. We always let them know there’s many ways to improve cash flow. From cutting costs in the right places to negotiating better terms on their purchases. But the first piece of advice we always offer them (and it’s one that is often overlooked) corresponds to timely invoicing.
Delaying the invoicing process after a sale will almost always postpone cash collection. Unfortunately, the ramifications can go beyond that:
- If you wait too long, the business you’re transacting with may not have it in their budget anymore to pay you. Your business may have to wait an extended period of time to collect the funds owed to you.
- You may be dealing with a business that is close to bankruptcy (without you know knowing). By waiting too long, you run the risk of not collecting payment for your invoices at all.
- Your customers may have forgotten the details of the job and may inquire about the details of the work. This creates lots of back and forth, which produces even further delays.
- Business owners’ lives can get hectic from time to time. If you don’t invoice immediately, you may forget to invoice the customer altogether.
Make it a habit of invoicing your customers right away. If they agreed to work with you, they are expecting to pay.
If you provide recurring monthly invoicing, use cloud-based accounting software to auto-generate them. This will automate the invoicing process for you and provide you with faster payments.
Faster payment = Better Cash flow
Do you issue an invoice and wait for the check to come in the mail? This can wreak havoc on your cash flow. Your vendors are asking for payments up-front while you wait weeks upon weeks for your customers to pay. This is the typical scenario that puts a business into a cash-crunch.
With so many online-based payment services available, it’s easy to accept payments by credit card or online bank transfers.
Two extremely popular payment services used today are Stripe and PayPal. After an easy setup process, you can start charging customers’ credit cards right after you issue an invoice. You can also use cloud-based accounting software to send invoices with a direct payment link.
By accepting payments sooner, you ensure that you have excess cash for all your business needs.
If you sent your customer an invoice and some time has passed, you must follow up persistently.
You and/or your team should review your accounts receivable listing frequently. Make it a weekly habit to check your outstanding invoices and follow up on unpaid invoices. Be sure to mark down when the customers agreed to pay and follow up again shortly thereafter if payment has still not been made.
With cloud-based accounting software, you can check your accounts receivable listing from anywhere. From there, it’s as easy as clicking one button. You can either re-send the invoice to multiple clients, or send statements to customers with multiple invoices outstanding.
By being diligent and improving your invoicing process, you’ll greatly improve your cash flow. This provides you with the flexibility to pay your bills sooner, or better yet, re-invest in your business ahead of time, leading to further growth.
Lior Zehtser, CPA, CA is the co-founder of ConnectCPA, a forward-thinking online accounting firm that utilizes cloud accounting solutions to help simplify the lives of small business owners. You can find them on Twitterhere @Connect_CPA.