Hello SOTGC community,
The majority of small businesses don’t fail because of a bad business plan or bad management. The number one cause of business failure is lack of cash. If you are a business owner or thinking of starting a business, one of the most important things that you will want to establish is a solid process to keep positive cash flowing.
Cash flow is the foundation that a successful business is built on. Every day that you are not getting paid your business is losing money. It’s important to stop financial leaks early, and keep your business from building huge debts.
1. Get a Retainer
Consider asking for a retainer up front. A retainer is simply an agreement to be on call for an agreed upon monthly fee. A retainer may not be “standard” in your field, but can easily be implemented in any service based business. Retainers lock in clients for set time period, and offer businesses guaranteed cash flow.
- Monthly or quarterly retainer for ongoing services
- Offer discount on services or product with retainer
2. Strict Payment Terms
Payment terms should be an essential part of your consultation. Establish payment due dates, late fees and non payments from the very start of any working relationship. Be sure that payment terms are clearly written in any service agreement or contract. Never rely on verbal payment terms and never waiver from the written terms in place.
- Establish payment due date
- Establish late fee
- Establish non payment terms
3. Accounts Receivable Process
As a business owner, you should know exactly what invoices are outstanding and for how long. Review your accounts receivables daily or at least once a week to stay on top of them. Invoices 30 days old should be dealt with daily via email or telephone until paid. Note: once an invoice goes beyond 30 days it will affect your cash flow. Be prepared to turn invoices overdue 30 days or more over to an in-house or outsourced collection agency that can quickly recover the funds.
- Review accounts receivables daily or weekly
- Make daily or weekly contact on invoices 30 days overdue
- Turn invoices overdue 30 days or more to collections
4. Have a Business Recovery Plan
A business recovery plan covers your business when unforeseen disruptions occur within the business or with your key suppliers. Have funds set aside or a credit line in place to be used incase your business’ cash flow is temporarily interrupted. Keep your accounts payables up to date. This will give you a little leverage to negotiate payment arrangements with debtors should you ever have a cash flow problem. You should have at least three months of working capital set aside to pay employees, office expenses and suppliers. This will keep the doors open until your cash flow is fully recovered.
- Have 3 to 6 months of working capital saved
- Establish a business credit line for emergency capital use
- Keep account payables up to date