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Dear Business Owner, Having cash available when you need it is critical to running a successful business. Good cash flow allows you to pay your invoices, survive downturns and take advantage of growth opportunities. We hope the enclosed guide provides tips and guidance to help you improve your cash flow management. In it, you will learn strategies that can help ensure a healthy flow of cash through your company, including how to: To learn more about cash flow management and other strategies to improve your profitability, as well as other 000-000-0000 and mention the code 000. Sincerely, WP-Ltr-0210
The Essentials of Cash Flow Management PAGE 1 The Essentials of Cash Flow Management PAGE 3 Summary: Five Ways to Improve Your Cash Flow PAGE 4 Cash Flow Resources As a business owner, you know that managing cash flow is vital to whether your business is profitable or not. However, business owners at all stages of their careers can benefit from learning more about best practices in invoicing, collections and credit and cash management. This guide is for those who want to refine their cash management process and gain more control over paying invoices on time; improve their credit rating to increase the odds of obtaining a loan; take advantage of growth opportunities; or prepare for setbacks, such as a sales slowdown or a cash crunch. SET A STRATEGY Maximizing your profitability means treating cash management as a strategic endeavor. You should create a plan for cash management the same way you do for marketing or for new product development. Create a framework, including: a reserve fund. you provide. loans or lines of credit. toward them. INVOICE QUICKLY of the month. If you don t already, send your invoices electronically to speed receipt. Avoid potential payment delays by including your company name and address, a description of what was delivered, your employer identification number and bank account information for electronic payments, and anything else your customers request, such as a purchase order or vendor number. Consider offering multiple payment methods, including charge or credit card or electronic funds transfer, so you can receive payments more quickly. (Article continued on Page 2)
2 THE ESSENTIALS OF CASH FLOW MANAGEMENT THE ESSENTIALS OF CASH FLOW MANAGEMENT 3 Send invoices as soon as a project is finished and be sure they are accurate; and follow up on past-due invoices promptly. FOLLOW UP ON YOUR COLLECTIONS It s important to monitor the payments that are due to your business, especially during a If a customer is more than 10 days late, follow up with them. Research shows that the longer an invoice is past due, the less likely it will be paid. If invoices are more than 30 days overdue, call or write a senior manager at the company that owes you money and remind them that you haven t been paid. It can be difficult to strike the balance between collecting invoices and maintaining good relations with customers who may represent more business down the line. One way to minimize this risk is to outsource the function to a bookkeeper, accountant or other resource. USE ONLINE TOOLS Online cash management tools can help you keep track of your cash. Many banks offer online applications that let you check balances and fund availability, transfer funds between accounts and pay invoices online so you don t have to write and mail checks. Remote deposit allows you to scan checks and transmit the information directly to your bank, which can save time for businesses that collect many checks. It can also shorten the time checks take to clear. You may want to use an online system that creates invoices so customers can pay online and so you can track and organize your invoices more easily. This also allows money to automatic payments on your credit or charge cards that offer rewards points, which can add up to substantial savings over time. ASSESS YOUR OFFERINGS a more predictable revenue stream. A loyalty program for example, buy 10 items, get one your customers and track their spending. Then, you have to motivate their behavior so they want to spend more; for example, reward loyal customers with a percentage off after they reach a certain level of spending. Once you ve been doing this a few months, make sure you measure your results and modify the program accordingly. REVIEW YOUR EXPENSES Even if you use the same vendors consistently for example, your phone service, insurance, web site hosting, etc. you want to evaluate these services and goods regularly to seek out the best packages and prices. At a minimum, conduct annual reviews to get the best value you can, since your requirements and vendor offerings and pricing can change significantly in a year. Ask other business owners about the tools they use and deals they receive. Look for discounts through professional associations. Your charge or credit card may offer savings on everyday business expenses, such as shipping, hotels and transportation. Explain your payment terms clearly on all invoices. If a customer is more than 10 days late with a payment, contact them. MANAGE CREDIT CAREFULLY Maintaining good credit can help you access additional funds if and when you need them. Check your business credit report regularly with the major business credit bureaus, such as Dun & Bradstreet, Experian or Equifax. If anything is incorrect or outdated in your report, work with the bureau to correct it. You can also ask vendors to report your positive payment performance. This will help strengthen your credit history. TIME PAYMENTS TO MAXIMIZE CASH FLOW Often, payment dates are negotiable. In this current economy, many businesses have moved from paying within 30 days to 45 or even 60 days. And payment timing can vary; bills, such as rent or a phone bill, late without adverse consequences, you may be able to negotiate for extended payment terms or discounts for early payments with some suppliers. This allows you to use that cash to pay more pressing invoices or to use for payroll, or it BUILD RESERVES Any business can be charged with an unexpected tax or legal penalty, need a sudden equipment or maintenance requirement, or lose a customer that leads to a cash crunch. This is why it s important to have cash available so unexpected expenses won t hurt your business. Even good news, such as landing a big new account, can lead to a cash shortfall as funds for these unpredictable, but all too possible, expenses. If it s not feasible to save pay back once your situation changes. Your Cash Flow Having cash available when you need it is critical to running a successful business. Follow these strategies to help keep your company financially healthy. 1. KNOW WHERE YOU STAND The first step to managing your finances effectively is to have a cash flow forecast, which is simply your projected revenues minus your projected expenses over a given time period, such as each month for a year. Think of this as your financial roadmap, showing you the financial peaks and valleys ahead. 2. PREPARE FOR CASH SHORTFALLS Equipped with your cash flow forecast, you can apply for a loan or line of credit when times are good, which can help improve your odds of obtaining credit. It s wise to have multiple sources of 3. SMOOTH REVENUES found that a big new contract can actually spell disaster, since the expenses required to fulfill it staff, inventory, equipment, warehouse space, etc. can quickly exceed available cash, leading to a crunch or, worst case, a failure before payment is received. (Article continued on Page 4)
4 THE ESSENTIALS OF CASH FLOW MANAGEMENT Save time by using remote deposit, which allows you to scan checks and transmit the information directly to your bank. 4. MANAGE EXPENSES rewards points or miles you accrue; they can add up to significant savings. 5. BE DILIGENT ABOUT INVOICING bookkeeper or accountant may be able to help. Cash Flow Resources Most businesses need financial advice from time to time. Use these resources to learn more about ways to improve your cash flow management. National Federation of Independent Business (NFIB) www.nfib.com provides numerous articles on financial management in the Finance and Accounting area of the Business Resources section of its web site. Small Business Association (SBA) www.sba.gov access for small businesses to government contracts, as well as guaranteeing loans to small businesses. Its site provides information on a range of topics and offers guidance in securing loans and disaster assistance. SCORE www.score.org assistance to help small businesses start and grow. Its web site offers workshops and advice for entrepreneurs. or visit www.openforum.com/cashflow. Copyright 2010 American Express Company. All Rights Reserved. The information contained in this document is meant for advisory purposes only. American Express accepts no liability for any outcome of its use. WP-0210