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No Money, More Problems

The Importance of Managing Cash Flow in a Slow Economy

Theres nothing like landing a great new project. When the go-ahead on a lucrative installation finally comes through, you cant help but feel a major success. But as important as it is to enjoy that moment of elation, it is also essential to understand that new business and the resulting profits arent the only indicators of success.

In the end, cash is often a businesss make-or-break factor, because it is what covers routine expenses and keeps your business operating day in and day out. Thats why successful businesses not only keep an eye on sales and profits, but also learn to monitor the delicate balance between accounts receivable and accounts payable to keep cash flowing.

In a slowing economy, monitoring cash flow is more important than ever. With news of a downturn, consumers do what they can to hold on to their money, whether that means spending less or simply taking longer to pay. In addition, all businesses face the effects of increased oil and fuel prices, whether directly or through the rising cost of supplies. The net result is growing cash-flow concerns. While 46 percent of business owners last year said they were experiencing cash-flow issues, today, 56 percent say that they have cash-flow worries, according to American Express OPENs Small Business Monitor, a semi-annual survey of business owners.

The following tips can help you optimize your financial standing in any economy.

Offer a Variety of Payment Options
On the receivables side, its important to collect cash as quickly as possible, because unpaid invoices wont pay the bills. One way to speed up the process is to offer a variety of payment options.

Next to cash, perhaps the easiest and most convenient option is to allow customers to use a variety of charge and credit cards. Its difficult to beat them when it comes to maintaining healthy accounts receivable. No matter how long customers decide to take to pay off debt, youll receive cash quickly.

When making decisions about payments, take the time to reassess your payment schedule. Because of the significant equipment costs required for each installation, most companies require a sizeable down payment to begin the job. It may be worth periodically recalculating whether this initial payment covers all of your start-up expenses. Remember that equipment is just part of the expense. Youll also have to stock other supplies to be ready for the job. With the steeply rising costs of cabling, for example, you may actually be collecting too little up front, and that will leave you covering expenses until the next payment arrives. Also, dont calculate the down payment on the assumption that you will see a second payment soon thereafter, because youll regret that assumption if construction delays or other unforeseen circumstances postpone the installation.

Unlike the initial payment, subsequent paymentsand especially the final paymentmay take longer than in the past, given the slowing economy. If you feel this is affecting your business, then consider offering a discount for early payment, and try encouraging credit card payments.

Overhaul Collections
For customers who dont pay by credit card or dont hand you a check upon completion of the project, youll want to do what you can to make sure that their payment arrives promptly. Look for ways to improve your collections process by understanding your customers billing preferences and procedures. Most small businesses can improve collections by attending to the basics.

Take steps to keep all customer information up to date. By maintaining current telephone numbers and address information, youll speed collections work and reach customers promptly. Should your invoice, for example, be sent to the address where the installation took place, or is there a better address, such as a primary residence? Calls to out-of-service numbers, or notices and reminders to old or weekend addresses, will only add more time to the collection cycle; thats what whittles away at cash reserves.

Its also important to designate an individual who actively keeps an eye on accounts receivable. Hire or assign a reliable bookkeeper or accountant who works on a contract basis to handle accounts-receivable functions. His or her job will be to approve credit, if applicable, make collection calls, receive payments, and make deposits.

Get the Most from Your Money
Keeping the books balanced isnt so easily accomplished, but once healthy accounts receivable are in the works, the second step is within sight. In short, once youve collected the cash that you are owed, hold on to it as long as possible.
One easy way to improve your cash situation through accounts-payable practices is to take advantage of credit cards to delay payments (see sidebar.) In particular, cards that offer flexible terms are a great way to keep cash flow healthy.

Maintaining the delicate balance between accounts payable and receivable isnt necessarily easy, but with concerted effort and some common-sense strategies, you can build a more solid financial foundation for your business.

David Shapiro is vice president for American Express OPEN, the nations leading issuer of payment products for small business owners.