Keep in mind that your buyers can and will miss payments. It is your responsibility as a business owner to make sure that these lapses are covered. Do not live from paycheck to paycheck. Keep a revolving emergency fund to hold you afloat during lean times.
One of the main reasons for business failure is neglecting to accurately forecast future cash flow. If you don't know what your buyers owe you and what you owe others, you will not have a precise understanding of where you are now and where you will be in the next months. Make it a habit to prepare cash flow projections. Start by doing it weekly and then progress to longer periods. Seeing your cash flow on paper enables you to identify possible trouble even before it happens, and zoom in on opportunities to improve revenue.
The formula for a positive cash flow is simple - your must receive your receivables before you pay for your payables. Encourage your customers to pay ahead of time by offering incentives such as discounts. Follow up immediately when buyers are slow to pay, and consider changing your payment regulations (like shifting to cash on delivery).
To effectively manage your payables, retain your money for as long as you can without defaulting on any of your bills. There are many ways to do this, but one of the simplest solutions is to enroll in an online payment system. This way you can pay all your bills with one click on the day they are due. The benefits are twofold - you cut processing costs and use your funds as long as possible.
26th March 2009
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