What determines the success or failure of a small business in today’s environment? Two words: cash flow. Today’s business downturn is forcing many businesses to confront cash flow-related issues that were overlooked when business was better.
The good news: by implementing an effective cash management system now, today's pain will translate into tomorrow’s gain.
Maximizing your financial productivity
Many small businesses don’t use the revenue cycle to their best advantage. Nor do they utilize the tools and technologies that can help them improve and better anticipate cash flow, streamline payment processing, improve back office efficiency and reduce costs.
Is your business one of them? See if any of these scenarios sound familiar.
Your cash flow has ground to a halt. Cash is to a business what blood is to the circulatory system. If the flow slows to a trickle or stops, you’ve got a problem.
Solution: A line of credit can provide the cash you need to tide you over during periods of financial drought. However, banks will take a harder look at your books this time around, even if you’re just interested in renewing existing credit facilities. Your banker may also have ideas on how you might restructure a loan or consolidate debts to reduce your present payments.
Not such a good idea: Some owners choose to tap into their equity for cash flow. That is not always a good idea, especially if it limits their ability to consider new opportunities. That includes drawing from a 401k account or taking out a second home mortgage. It’s typically better to use equity to help create new sources of revenue; by identifying new customers, adding services or selling through different channels.
You want to receive payments faster. Money is coming in to your business; it’s just not coming in fast enough.
Solution: Create a formal collection system. Remind customers of the terms they agreed to, and perform regular follow-ups to remain high on their bill-paying list.
To further speed the collection process, consider automating your lockbox. By letting your bank manage payments, you can help ensure your customers' funds are deposited on the same day they’re received, improving your cash flow.
If you have a business that requires your employees to visit customers’ homes or offices, invest in mobile technology that enables them to make electronic payments before they leave. You’ll streamline your invoicing process and reduce the number of bad checks you receive.
For businesses that receive paper checks, you’ll gain access to your funds faster and improve cash flow by processing them electronically. Remote deposit technology makes it possible to process your receivables as you receive them, right from your office computer, rather than making trips to the bank.
Also a good idea: Online banking solutions can also provide you with same-day reports on your cash position, helping you know and better predict cash flow.
You worry about fraud. Accounting irregularities, price gouging and outright fraud increase during economic downturns. Even long-trusted employees can take advantage of you.
Solution: To stop the problem before it starts, you’ll want to adopt stronger internal controls. Your bank can help with a host of fraud prevention tools. Positive pay, for example, allows your bank to electronically match checks presented for payment with your check register—making it harder for employees to skim and not get caught.
One final reason to talk to your banker: Attorneys and CPAs bill for their time by the hour. Talking to your banker won’t cost you a nickel. While bankers can’t provide legal or tax advice, they can share the best practices your peers are using to keep their businesses lean right now. iBi
During October, Commerce Bank is celebrating Small Business Appreciation Month. If you’d like to learn more, go to commercebank.com/smallbusiness.
