How to Avoid a Cash Flow Disaster
Whether you are a new business owner or have been running a successful operation for years, there are steps you can take today that will help you avoid a cash flow disaster. The processing of receivables and payables is one of the most important factors for the ongoing success of a business and by taking the proper steps you can make month-to-month operations more streamlined, help protect your business against fraud, and build in resilience that helps you avoid cash flow issues.
Know Your Options
Start by finding out about your cash flow management options and determining how receivables and payables are going to be handled. If you’ve been in business for many years and haven’t considered this question in a while, you might want to revisit it. Technologies are changing so quickly that the way you set up to handle receivables and payables five or ten years ago may no longer be the best choice for your company.
If you skip the question process and jump right into processing receivables and payables, you are on unstable ground because of the lack of organization and structure. Be sure to ask questions such as:
- Are your clients and vendors mainly using credit cards, ACH (Automated Clearing House), wire or checks?
- What is the percentage being allocated to each of these methods?
- How will this change over the next few years? Is there a new technology you need to be ready for such as mobile?
- Are your vendors offering discounts if you pay electronically?
You will also want to do your research or talk to your banker and learn about the top methods for cash flow. For example, collecting money by ACH is typically the most efficient method because business owners have more control over the timing of receivables and payments,, scheduling the transaction on the due date and avoiding an interception of the information.
Choose Your Best Option
Just because a cash flow management option is available, doesn’t mean it’s right for your business. You need to consider your business’ size and staffing levels since some cash flow management methods take a larger effort and more employees to handle. In making ACH payments, best practice is to have one employee assigned to initiate the payment, while another employee needs to approve it. Or maybe your company has a different system for checks and balances that doesn’t fit with ACH. If you have questions about the most successful system for your business, don’t hesitate to ask your banker for more information.
Your best option may also reflect what your customer base is using. For example, if your customers are using credit card payments, you will want to have merchant processing and credit card processing available for a more integrated receivable system that connects with your reporting and general ledger. Make sure you’re aware of the fees that may accompany any programs or systems that you choose.
Figure Out Your Obstacles
You will also want to figure out any obstacles to overcome to choose the best strategy for your business. For example, in discovering what is keeping your company from electronic payables and receivables over paper checks, you may find there the barrier isn’t technological or tactical but is simply the resistance in your back office to changing the way things have always been done.
Know Who’s Doing What
Strong information reporting can create both efficiency and fraud protection. Each business needs to establish who has access to financial information and what kind of activities they can do with the data available. If this is not clearly established, a step in the process could go unnoticed or the information could end up in the wrong hands. A surprising number of businesses are vulnerable to simple forms of fraud because they’re not tracking their cash the whole way through their system—make sure that you are.
Adapt with What’s Trending
Electronic payments are on trend, particularly for consumers who pay with credit cards to accumulate rewards. Consumer pay is evolving into a prominence of credit cards and debit cards with little to no cash or checks being processed. Being able to meet the needs of your customers is crucial in keep your cash flow under control. Having a variety of options available will keep your customers loyal and could result in an added customer base.
Know When to Improve Your Cash Management Plan
It can be difficult to tell whether or not your cash flow management plan needs to be improved but by asking the right questions, like Anchor Bank’s discover questions, you can perform an analysis and figure out whether or not you’re headed down the best path. For example, if you are experiencing difficulty in collecting your receivables, this is a red flag to look at your options.
The business banking team at Anchor Bank offer cash flow management services and can help you determine a plan that works for you. Contact your Business Banker or Cash Management Specialist for more information.