Businesses do not fail - they just fail to manage money.

And it’s especially true in today’s economy.  For the last few months, we’ve been seeing many businesses that are profitable on paper, but nonetheless are struggling to meet payroll.  Of course, their sales may be down, but the real culprit is poor cash management!

Surviving the tough times is not only about how much money you make but also when you make it and when you spend it i.e. cash flow. Cash flow management is critical to run your business. In simplest term it means delaying the outlays of cash as long as possible and encouraging all your customers to pay you as soon as possible.

Usually a business owner delegates this task to her accountant. However, I will recommend that it is the time for you, a business owner, to pay close attention to it. The steps you take today to allocate your cash will decide what kind of business you will have six month or a year from now. So here is the golden rule to manage your cash and ease your tensions.

Never spend a penny more than the cash you have collected last week. It doesn’t matter how much you are planning to collect this week!

What will happen when you follow this rule? Let’s see:

Receivables will improve

Since you cannot pay more than what you have collected; only way to fulfill your payment obligations is to collect more. Here are few suggestions to collect more:

• Give incentives to your customers to pay quickly e.g. if your standard term is Net 30 you can give 5% discount for Net 15 payments
• Ask for deposit along with the order
• Issue invoice promptly and follow up immediately at the first sign of slowness
• Track account receivables to identify and avoid slow paying customers. Either fire slow paying customers or give them Cash-on-Deliver (COD) option
• Use collection services as needed.
• Get rid of excess inventories, inventories is not cash

Payables will slow down

Since you have tightly closed the vault, you will find creative ways to delay the cash outlays. Here are few tactics that I have seen people use successfully:

• Taking the full advantage of payment terms i.e. if payment is due in 30 day don’t pay in 15 whether you have cash or not.
• Use electronic fund transfer system to make just in time payments
• Trade credits: communicate your situation with your vendors to gain trust and trade credits.
• Renegotiate contracts

This simple rule will change the behavior of your employees and will drive them to work more diligently towards business success. In order to implement this rule successfully you have to develop a cash-flow forecast. The name may sound intimidating but in reality it is a simple worksheet that shows how much money you will get every month and how much you will spend. This simple report will help you to see what changes need to be made and when.

It is easy to spend, isn’t it? The outlay part of the cash flow is never been a problem. Keeping the money coming in on a regular, sustained basis is the tricky part of cash flow management. Following the suggestions above will make it easier to keep your cash flow flowing. You can also look at our 120 Day Sales Growth Program that is defined to increase your sales in this economy.