Cash is king and nowhere is that statement more imperative than in a small business, especially in the start-up phase. Being undercapitalized at any point in your business cycle is problematic, but in its infancy it can be a door slammer. The statistics speak for themselves. Research from CB Insights shows that 29% of new businesses failed because they ran out of cash.
Similarly, data from Guidant Financial shows that the No. 1 challenge for 33% of small business owners is lack of capital/cash flow. Similar surveys show the majority of business owners are using Excel spreadsheets to keep track of their financials, and are not using accounting software. There is nothing wrong with Excel, in fact, you should be using it for certain tasks, just not financial statements.
The dramatic increase in ease of use and the decline in software prices have really made it a no-brainer to score a good accounting package. In addition, this will help your accountant out, and will save you money due to not having to use as much professional accounting help. The following are a few accounting packages you should check out.
The cash conversion cycle of your business is akin to the velocity of money measure on the macroeconomic level. In management accounting, the cash conversion cycle measures how long a firm will be deprived of cash if it increases its investment in inventory in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth. According to Andy Bailey, CEO of Petra Coach, the cash conversion cycle, “Is one of the most important metrics to monitor while your business is growing. Small businesses typically have only 27 days of cash to pay the bills, which doesn’t provide much buffer when times get tough.
All of this is considered as short-term funds management, a topic discussed widely in business schools, and for good reason. As you see from the graphic above, accounts receivable is a key component to increasing the cycle. Obviously, you want to bring in these receivables as quickly as possible. Here are some suggestions.
- Do not delay sending invoices to clients.
- Make it easy for clients to pay by setting up auto payments electronically or via credit card.
- Make sure invoices are accurate and easy to understand. Nothing delays payment like an incorrect and/or confusing invoice.
- Send clients reminders five days before payments are due, and follow up immediately (with a friendly reminder) if a bill has not been paid on time.
- Thank clients when they pay on time.
The flip-side of the coin is accounts payable. Compare payment terms of each of your creditors, as you would with your personal credit cards, etc. If your payments allow for a 2/10 net 30, take this discount if you can. If discounts are not offered, approach your creditors about obtaining them. Otherwise, float your money to the extent you can without being delinquent.
Inventory is one of the other costs that obviously consumes cash. Discuss ways to enhance inventory turnover with your production crew, as they will offer valuable insights that accounting cannot. The quicker you produce and deliver a product or service, the quicker you get paid. As always, seek advice from your accountant or CPA as soon as you think there may be a cash flow problem.