By Jennifer Barnes, the CEO of Optima Office, Inc, which provides accounting and HR services, from CFOs to bookkeepers, on a part-time basis.
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In the first quarter of this year, a U.S. Chamber of Commerce study found 80% of small business owners felt comfortable with their cash flow, but by April, that number had dropped to only 59%. On average, businesses have 27 days of cash flow. Because of the novel coronavirus pandemic, many companies shut their doors. For a business, running out of cash while trying to pivot through this volatile and highly competitive market can be devastating. Here are seven tips for improving your business’s cash flow during this difficult time:
1. Leverage automation within your current systems.
If using an enterprise resource planning (ERP) system, make sure your accounting team is trained on all its automation features so they can spend less time on manual data entry. This frees them up to focus on more value-add tasks that help grow your business. Streamlining your invoicing process can also reduce manual errors, get you paid faster and improve relationships with your customers and vendors.
2. Monitor your cash flow on a weekly basis.
Right now, most businesses have less of a cash buffer, which is why it’s so important to forecast incoming cash and outgoing expenses. A 13-week cash flow forecast is necessary to see if you have enough to cover your operating costs.
3. Set clear contractual payment terms to avoid issues.
When writing payment terms, the sooner you can get paid, the better. However, you need to weigh this with the chance of losing out on a customer because of tight terms. Many customers will ask for 30- to 60-day terms. You need to decide if extending these terms will work for your cash flow. In general, payment should be received within 10-20 days of an invoice being sent out, but make sure to forecast late payments into your cash flow forecast or at least be conservative with your expectations so you aren’t missing a payroll.
Another way to ensure payment is by setting up automatic payments via ACH or credit card. If you automatically charge your clients each month, you don’t have to wait for payment. If a client becomes more than three payments past due, it is a best practice to stop providing the service or product to them until they get current.
4. Incentivize your customers to pay you on time.
A Sage North America study found 13% of U.S. invoices are paid late, and of those, 10% are written off as bad debt. If a client is 30-45 days past due, make sure your contract includes a monthly interest rate of around 1.5% to encourage them to prioritize paying you over their other vendors.
5. Achieve more cash flow flexibility by paying your bills only when they’re due.
There’s no reason to pay invoices early when you may need that cash for something else. Instead, set up automatic payments a day or two before they’re due to make sure they arrive on time. Knowing exactly when payments will be made will also make it easier for you to track your cash flow.
6. Set appropriate expectations for government program repayment.
The Families First Coronavirus Response Act (FFCRA) and Family and Medical Leave Act (FMLA) have been lifesavers for many businesses across the U.S. These programs offer tax credits covering sick leave or time off spent caring for children or loved ones. In the guidelines of these programs, companies are allowed to keep payroll taxes instead of sending them to the Internal Revenue Service (IRS).
However, it’s important for businesses to monitor how these programs can impact cash flow. For example, you may need to pay your employees in the near term for their paid leave taken through the CARES Act, but it may take a few pay periods before you receive all the tax credits. This can become a cash flow issue if multiple employees expense these costs all at once. Furthermore, what if you defer payroll taxes for an employee and then they leave? You’ll likely be on the hook for these funds, although final guidance has not yet been given. At my company, we have decided not to defer taxes for this very reason.
7. Selling your invoices is an option if you need cash fast.
In exchange for a fee, factoring companies can buy a pending invoice. However, these fees are usually around 20% of the value of the original invoice. So, if you have $1 million in receivables, you will receive $800,000 immediately, but the factoring company will get to keep the other $200,000, plus earn interest on the balance they pay you. For many companies, margins may be too low to be able to afford this option. If you do want to go this route, look for referrals within your network.
Following these steps will make it easier for you to track the funds that are going in and out of your business. These tips will hopefully enable you to make strategic decisions that help your company grow during these difficult times. If your cash flow forecast shows you will need more capital, it’s good to know in advance and make a plan. It is also crucial to have an accurate balance sheet in order to secure a loan. Banks are often more willing to help businesses that keep their books well organized and reliable, which makes the underwriting process significantly easier.
