When it comes to running a small business, it’s all about how you manage the money.  Even profitable companies can be doomed by poor cash flow, and it’s not a rare phenomenon. Struggling to collect payments from clients, and having invoices that linger for more than 90 days are shockingly common problems for small business owners. Here’s are some ideas for better managing accounts receivable (AR), accounts payable (AP), and cash flow in your small business.

If cash isn’t flowing through your business each month, you’ll have trouble paying your own bills and you’ll eventually end up having problems with your suppliers. You could have to tap personal cash reserves or factor invoices just to make ends meet. To avoid constant cash flow issues it’s essential that you do what you can to get your customers pay you in a timely manner.

Collect Money As Fast As You Can

You want the time it takes you to get paid (days in AR) to be shorter than the time it takes you to pay your obligations (AP days). When this is the case, cash flow is generally better, yet you can still negotiate favorable terms for paying your suppliers. It makes intuitive sense that your business should collect money faster than it pays it out, but it’s not always under your control. Whenever you can negotiate a 30% or 50% up front payments, but recognize that some clients won’t let you bill until 30 days after you started work. Once you are an established in business, you’ll need to secure a line of credit from a bank to float the business until your first invoice is paid. But if you get this dynamic backwards too often, problems can become severe enough to threaten your business altogether. As a small business owner, you can expect to face cash flow hiccups, but overall, having the AR and AP balance in your favor is a huge advantage.

Reducing Average Days in AR

There are many affordable ways to ditch the paper and stamps and significantly speed up payments from clients. Electronic invoicing is the way to go. Also requesting EFT or Electronic funds transfer payments also allows you to shorten payment terms. Sending out invoices as soon as a product is delivered or a project is completed should be standard practice rather than waiting until the end of the monthly billing cycle. The sooner clients receive invoices, the fresher the transaction and your services will be in their minds.  Find out your customer’s payment terms up front and if possible get the contact information for someone in the accounts payable department.

Outstanding customer service is essential to maintain and increase your customers and getting paid. Happy customers are more likely to pay you on time. Offering multiple payment methods (like cash, checks, credit cards, and online payments is another helpful thing to have in place.  This means the stars don’t have to be aligned so the customer has money, an envelope, and postage stamps all at the same time. If Collections and managing your AR is too time-consuming or stressful, you should strongly consider outsourcing it. The investment in outsourcing AR management can pay off in terms of better cash flow and less stress on you.

Tips for Managing Accounts Payable

Timing your payments strategically is as essential to good cash flow management too. Your goal should be to stretch payables as long as possible without hurting your credit or credibility. Negotiate a Net 45 payment with your vendors or a pay-when-paid policy. Have a set day and time for how you pay vendors.

Explore which vendors offer cash discounts or cashback and whether they would be worthwhile. Negotiating favorable credit terms with suppliers benefits your business, and is easier when your cash flow, AR, and AP are all ticking along as they should be. It’s also wise to space out cash disbursements so that you don’t have to make a lot of payments right on top of one another. Let your contractors know, we only cut vendor checks once or twice a month. Be careful with this though. If you wait too long to pay suppliers, you could damage your credit, and they could start demanding prepayment, and that can put a huge kink into your cash flow. Finally, if you have a business credit card, have a strong policy about using it wisely. Stay away from cards that charge transaction fees and look for cards that charge interest from the invoice date rather than the date of purchase.

Benefits of Smart Money Management

Manage both AR and AP with skill and you’ll reap benefits like better cash flow, lower operating costs, and time savings (because you’re not spending time chasing late payments or explaining why your payment to a vendor is late). Being careful to whom you extend credit. Pay your company’s bills on time. It sets the foundation for fewer average days that accounts spend in AR and for future negotiation of better payment terms with your suppliers.

When you manage AR and AP consistently, through both good and challenging economic times, you maximize your company’s potential for both short term and long term success. I encourage you to sign up for my weekly newsletter for a steady supply of tips and small business ideas that can help you make the absolute most of having your own business and being your own boss.