09/ 26/ 2007
by Lee Gimpel
Discover the secrets of controlling your cash flow
Monica Wofford, president of Orlando, Fla.-based training firm Monica Wofford International, continuously looks at projections that give her an idea of what her future income and expenses will be.
"If I see that there's a hole or a gap in an upcoming month, rather than waiting until the hole is there, I look at it from six or 12 months out," Wofford says.
Last May, an unexpected health concern kept her out of the office for a month. Those weeks underscored the importance of cash flow. "When you're down for 30 days, you probably won't see the ramifications for six months," she says.
To prepare for the dip she knew would follow, she increased her reserve funds by about $10,000, delegated responsibilities so the money could keep flowing if she was sidelined even longer and then started looking to see where the company could add revenue.
When a business is running smoothly, the difference between the amount of money coming in and the amount being paid out may not be an issue. But when you can't work or a client is late on a big payment, suddenly cash flow becomes a major headache--one that can almost always be addressed beforehand.
Elizabeth Potts Weinstein, a certified financial planner and owner of The Wealth Spa in San Jose, Calif., says if business owners aren't going to do the bookkeeping themselves, it's important to delegate it. Every week, you should review the business' profit and loss statement, balance sheet and pro forma cash-flow projections. Potts Weinstein says reviewing these key metrics can take as little as 15 minutes each week.
If you haven't made a habit of looking at cash flow, getting into the practice may reveal weaknesses, such as clients who habitually pay late or suppliers who demand aggressive terms. A quick way to improve cash flow is to send invoices earlier, offer incentives for early payment and make it easier to get paid; running a credit card over the phone is much faster than waiting for a check in the mail.
One of the weaknesses that Potts Weinstein sees in many businesses is that they lack passive income streams, such as monthly maintenance or membership fees. Wofford's books, workbooks, CDs and DVDs helped her company bring in money even when she wasn't able to work.
Cash Is King
Tap these five sources to increase your cash flow instantly
1. Reward for early payment: Offer your customers and clients an incentive to pay early. You can offer a discount off the current bill or, if you'd like to secure repeat business, offer a discount off their next bill or throw in a future product or service for free.
2. Open a line of credit: Before your business runs into cash-flow problems, apply for a business line of credit. That way, when you're in a cash crunch—or want to take advantage of a great deal on a piece of equipment—the money is available if you need it. What's more, you only pay interest on the money you use.
3.Invest your cash: If you often have a positive cash flow, consider investing some in a high-yield savings account, making sure it's easily accessible in a cash crunch.
4. Pay bills only when they're due: In addition to not having to pay late fees and interest, another way to increase cash flow is to not pay your bills early. Set up a schedule and an automatic reminder—on your computer, for example—so that you never forget.
5. Charge a retainer: The practice of charging clients a retainer is popular with lawyers. If you're in the service industry and will be working with a client for an extended period of time, collect a portion of the total cost up front.
