Does it seem like the busier you are, the slower payment is coming back in? Here are some tips to increase your cash flow in your business. Accounts Receivable Turnover (ART) is a measure of the frequency of payment on accounts receivable, the money owed to you by your customers you are waiting to “receive.” An imbalance of Accounts Payable and Accounts Receivable can create a cash flow crunch.
When extending terms – net 30 or net 15, your customer in all actuality receives a no interest loan from you. The lower the amount of time extended the quicker customers pay off loans you make to them. Often this misbalance of cash can lead to a trickle-down effect for small businesses. Not properly managed, this misbalance can ultimately lead to stunted business growth, the need for extra credit or in slow payment to the business owner’s creditors which will affect their credit score.
How fast are you getting paid?
If your customers purchase goods or services through a purchase order, or you send invoices, the money you are owed is considered a receivable. If you’re a consultant and you perform a service and bill the client later, the bill is a receivable–it is money you are owed but have not been paid.
But a credit card sale used by the customer to make the purchase, allows a business owner to receive payment right away and the credit card company extends the credit. Although there are credit card fees applied, having money for the sale may have its benefits.
Your payment terms and whether your customers meet those terms affect your cash flow. You may ask for payment on receipt, or within 15 days, or 30 days–whatever makes sense for your business. Larger organizations may negotiate 60 to 90 day terms. In essence a small business can float the loan for up to 4 months again they are invoiced. Sometimes gaining a large client can result in a disaster on the balance sheet.
These are some tips to improve cash flow:
Realize that credit card payments and fees can run 3% of sales; if you can receive check payments within seven days from the majority of your customers, building in an intentional receivable delay may more than offset the fees you would be charged by the credit card company.
For additional processes and methods to improve cash flow, contact your business banker and/or Paxton Bookkeeping and Tax Services.