What do fuzzy socks bring to mind? For me, it’s simple: Winter.
And as an accountant, Winter is AKA Tax Season.
So, while most people start focusing on the year ahead in January, to us accountants, the new year doesn’t begin until the snowflakes are gone, and April showers are preparing the way for May flowers.
Like all small businesses, cash flow management is essential to our firm.
Much of our income is seasonal, so luckily, there’s little to worry about during tax season, but we must be careful as the year progresses.
So, if you are a small business owner, you can use these simple but effective strategies to improve cash flow – the same ones we have successfully utilized over the years:
- Get clear on money coming in and out. One way to do this is by connecting all the apps you use for payroll, expenses, and generating revenue to a central system that gives you a snapshot of money coming in and going out. If you use cash to pay certain expenses, make sure you use expense-tracking software to record these cash transactions.
- Have a working budget that continuously compares actual income and expenses to those you anticipated.
- Do a monthly cash flow review, and incorporate it into your working budget. Whether you’re a solo practitioner or a small business with co-owners and employees, you can evaluate what new expenses or revenues are likely to come up in the month ahead and address potential cash flow problems before they become emergencies.
- Set payment terms that work for your business. Common payment terms in many industries are net 30-day payments. The downside of net 30 for small companies that invoice at the end of the month is that if payment is a day late, it can affect the small business owner’s ability to pay monthly rent, payroll, or other expenses on time. When negotiating payment terms, consider asking for net-15 or net-20 payments to ensure you’ll still get paid monthly even if payment runs a day or two late.
- Encourage digital payment options as opposed to mailing checks. Waiting for a physical check to be cut, mailed, and deposited into your bank can take days to weeks. Even if some of the digital methods come with small processing fees, the benefit of receiving payments faster could outweigh the roughly 2%-3% you might have to pay for processing.
- Automate follow-ups and build in late fees. Ensure you have a system for following up on late payments. Build late fees into your contracts, as late payments can significantly harm small businesses. If a payment is more than 2-4 weeks late, you could consider adding a 5%-10% charge.
- Automate your invoicing, and if it’s practical to your industry, establish a system that allows you to automatically draft your client’s monthly fees from their accounts.
Taking steps to optimize your business’ cash flow will reduce your anxiety about being able to meet your monthly expenses and can set you up for success in 2023 and beyond.