As a small business owner, one of the key focus areas that determines your success is effective cash management. In fact, based upon the public information provided by services like Dun and Bradstreet (D&B); the interest rate and loan amounts from banks and lending institutions are primarily based on how well your business is able to manage cash.
If you are floating money and creating bad debt all over the nation, other businesses know about it. And managing cash is not just about perennial success Having a healthy cash balance in your balance sheet will also help you demonstrate effective management to potential investors by helping secure a better valuation of your business. Let’s be honest … no one wants to buy an unstable company.
So, to improve your company’s daily stability here are six important tenants for better cash management.
1. Working capital management.
Often cash flow management is restricted to just working capital management. This may mean that you’ll need to tightening some customers’ credit lines or shut-off customers with excessive past due balances. Both of these scenarios — if not addressed — can lead to delayed payments to your suppliers.
As a small business, “house cleaning” practices like this can disrupt revenue and cause customers to take their business elsewhere. But, as a small business owner, it’s often a fine balancing act between the risk of losing sales and the risk of bad debt.
Therefore, instead of tightening credit lines across the board, analyze a customers’ payment history and current business health before deciding on the depth of their credit line. While shutting someone off may be gratifying, it’s not always the best way to go about getting their balance. Here are some things to consider before making a decision:
a. Do they have a solid payment history?
b. Are there trends where payments slow down then balances are paid in full?
c. Have they always been slow to pay?
d. Are they always a few weeks (or months) behind?
e. Do they make efforts to contact you to deal with an open balance?
f. Are they manageably past due, yet eating up too many internal resources like customer service support?
g. Have they ever bounced checks?
Of course, there are many variables you can consider, but at the end of the day make sure you are not indiscriminately cutting off your clients.