Why is cash flow so important to your business? What about profits? Or revenue? Or sales figures? They’re all an integral part of your financial picture, but a positive cash flow is essential to your company’s financial well-being.
A strong cash flow enables you to pay debts in a timely manner, reinvest in the business, provide distributions to owners, pay expenses, and create a buffer that protects against financial challenges that might arise in the future.
So, how is your cash flow? If it’s weak or problematic, here are several key reasons that could be hurting your business.
Cash Flow Problem #1: Money is slipping out the door without your knowledge
To make sure that doesn’t happen, closely examine and then monitor your cash controls. Make sure you understand who in the company can:
- Access and sign physical checks on company check stock
- Get to the company’s banking relationships (cash accounts, credit cards, lines of credit, etc.) online
- Talk with your bank about any account
- Access your vault and petty cash drawers (if you have them)
- Use your inventory or capital asset supplies
- Spend money using a company debit, credit, prepaid, etc. card
- Authorize EFTs or wires
- Approve AP payments
Owners and/or the CEO are the only people who should have uncontrolled access to company funds. Anyone else, including C-level finance or operations employees, should have budgetary limits. Cash expenditures should have the approval of one or two individuals responsible for how and where it’s spent.
Cash Flow Problem #2: Not collecting payments from customers in a timely manner
It’s not unusual to allow customers to pay after the sale of goods or services, but that means you’re essentially offering them credit backed by your company. Before you go out on that limb, it’s important to perform due diligence to ensure that customers are creditworthy.
You should also tackle accounts receivable before they become a headache, instead of waiting until customers are in arrears for thousands of dollars. Take care of any delinquent receivables immediately.
Make sure you have explicit conditions for the terms you offer — and make sure your customers have agreed to them — so you’re able to charge late fees, reasonable interest, and have options to pursue collections if customers fail to pay on time.Regulations are in place to determine what a business can charge as a late fee or interest.
Remember that a collection agency will take a portion of the money they recover. So, make this a last resort.