Academic journal article Journal of Accountancy

10 Ways to Improve Small Business Cash Flow

Academic journal article Journal of Accountancy

10 Ways to Improve Small Business Cash Flow

Article excerpt

Cash flow is the lifeblood of any small business. A healthy stream is essential if a business is to succeed. In general, the key is to accelerate the flow of money coming in and delay what goes out. Having written credit and collection policies can also help. Here are 10 tips a business can use to improve cash flow

[1] Establish sound credit practices. Before dealing with a new customer, always get at least three trade references and a bank reference. Credit reports, available from Dun and Bradstreet and others, report on a company's general financial health as well as how quickly--or slowly--it pays its bills. Never give credit until you are comfortable with a customer's ability to pay.

[2] Expedite fulfillment and shipping. Fill orders accurately and efficiently, and then use the quickest means available to deliver products or services to customers. Unnecessary delays can add days or weeks to customer payments.

[3] Bill promptly and accurately. The faster you mail an invoice, the faster you will be paid. Where possible, send an invoice with the order. If deliveries do not automatically trigger an invoice, establish a set billing schedule, preferably weekly. Check invoices for accuracy before mailing them. All invoices should include a payment due date. An invoice without payment terms may fall to the bottom of a customer's pile of bills.

[4] Offer discounts for prompt payment. Given an incentive, some customers will pay sooner rather than later. Trade discounts typically give 1% to 2% off the total amount due if customers pay in 10 days.

[5] Aggressively follow up on past due accounts. As soon as a bill becomes overdue, call the customer and ask when you can expect payment. Keep a record of the conversation and the customer's response. Set a follow-up date in the event the promised payment is not received. Ask delinquent customers with genuine financial problems to try to pay at least a small amount every week. …

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