Wells Fargo Small Business Roundup

Jim Logan, author of the Cash Flow Blog, calls cash flow the "oxygen" of any business, and characterizes it simply: "It's about timing—the timing of money coming in vs. money going out. If you can't control that timing, it'll affect almost every aspect of your business."

When Logan talks about the ripple effects inherent in not keeping a close eye on cash flow, he's not discussing a failure of business as an abstract, and he highlights the very real possibilities of the problems that arise when your cash going out overwhelms that coming in (you may have invoices out there, but liquidity is what pays the bills):

Your expenses go up when you can't pay bills on time, as you're assessed late fees—"That's a cycle that digs its own hole," he says.
Planning is hindered—Plans you may have for a product launch, the addition of business equipment, advertising and promotion or for anything else that might be growth-oriented can be derailed.
Problems in your workforce—Cash flow issues can cause panic among employees. If, for example, people have questions about being able to cash their checks, they question the viability of a business, which can lead to turnover.
Customer turnover—What if you have trouble paying suppliers and they begin to slow the pace of delivery of goods and services to you, which, in turn, causes difficulty in getting goods and services to customers? If lead times on product delivery get longer on a sustained basis, loyal customers won't stay loyal that long.

So what can you do to streamline cash flow, both before problems occur and once they do? There are a number of tactics you can use to rein it in.

Track your cash flow—According to Logan, this is the first and foremost step to take. "When you make a sale, you may not receive cash for 30 days or more. Most businesses track booking and revenue, but you really should be tracking the cash," he says. "Know when cash will be available after you've delivered your product or service. How long will it take funds to be available at a bank? What are processing times for credit cards, debit cards, checks, etc.? What triggers customer payments? Be aware of when receivables come in and then become available as cash. Whether you work with a bookkeeper, an accountant or a software package, it's not hard to do. It takes a little extra time, but it's worth it."
Offer good terms, get good terms—If you offer a small percentage discount for payment within 30 days, you'll find that you'll likely have cash in hand more quickly. On the other hand, if you need to stretch payables, ask your suppliers for their absolute best terms—you may be surprised at the flexibility available to you.
Offer customers multiple ways to make payments—Accepting more than just cash and checks—credit cards, debit cards, Paypal or services available through QuickBooks, for example—makes you more attractive to customers, but also offers records that can aid in bookkeeping without slowing down how quickly the cash comes in, Logan points out.
Don't go high end—It may seem like simple logic, but we sometimes overspend on items, like office furniture, when good, attractive pieces can be purchased at used furniture stores (and there are thousands of these outlets nationwide).
Go out to bid—If you're looking at such goods as computers, phone systems, copiers or any other typically expensive office equipment, whether you're buying or leasing, talk to several vendors and get written proposals, so that you know exactly what they're supplying, what the prices and, almost as important, what their service policies are. And do it on annual basis to get the best possible terms.
Consider a factoring company—"If you've had cash flow problems in the past, or can forecast one, a factoring company—one that gives you perhaps a 70% to 80% advance on an unpaid invoice for the right to collect the total—might be a good idea," Logan advises. "It's not for everyone and it may not be a good ongoing strategy, but factoring companies can be a viable short-term solution. The key is in timing; the right time to develop those relationships is before you have the need, when you're not working against time."
Make customer terms crystal clear—For customers that don't pay at point of sale, invoice quickly and follow up. Prominently display your terms and conditions on all invoices. Include your terms in any proposals and acceptance of new projects so that there is no ambiguity around deliverables and when payment is due.

If you do run into cash flow problems, the one thing you must do is communicate. "Talk with your suppliers," counsels Logan. "Don't avoid them. If you honestly and clearly talk with them, they'll know what to expect and will probably be willing to work with you. If they can help you get back on track—and know that they can expect help from you should they need it—it will make your relationship stronger in the long run."

"Most importantly," Logan opines, "knowledge is power. Work with your bookkeeper or accountant to develop a cash flow forecast if you don't have one now. Streamlining your cash flow can help you control it, but knowing when problems may occur is what will help you stay afloat during the tough times."