Minimizing bad debts is a step towards effective cash management, which you must complement with better business management.
Small businesses are small in their operations and funds, and the latter is a primary concern to keep the show running. Most small business owners remain worried about proper cash management, focusing on smooth cash flow that can help the businesses maintain their rhythm and pace. Micromanaging cash is no easy task because of the numerous factors that can upset the balance between revenue and expenses and strain the cash flow, which, if not appropriately managed, can affect the business operations, observes Michael Osland.
Despite the best planning and deft execution of business plans, the uncertainties of business cycles remain one of the biggest concerns in ensuring smooth cash flow. Delayed collections are almost inevitable, becoming the biggest hindrance in meeting the minimum financial liabilities like salary payment, bill payment, rent, etc. Cash rich companies have more buying power that helps to plan for business growth.
Judging business health based on output is a faulty approach as it does not show an accurate picture. It means that profits are not the true indicator of the health of a business organization. It does not throw light on cash management which might be below par and could throttle the operations at any time.
To monitor cash flow, you must focus on the points from which money flows into the system and the corresponding outlets of expense so that you can work out the right balance.
Here are the factors to track closely for ensuring good cash management.
Manage receivables, says Michael Osland
Money earned by businesses from sales and other sources constitutes receivables. As per agreed terms of payments, selling goods to customers that specify the credit period is a standard norm for businesses. Most businesses offer credit to buyers, an established practice across businesses with very rare exceptions of asking for advance payments for some non-standard or specialized items not usually available. As long as the payments are due, it shows outstanding receivables in the books of accounts and is the cause of stressing the cash flow. Ensuring that customers pay on time will help to ease the cash flow worries.
Manage payments
A sale happens soon upon dispatching the goods and sending an invoice to the buyer, and it is from that day the counting of the credit period begins. Usually, customers try to stretch the credit period, and you must be vigilant about suspected customers to ensure timely payment. Often delays in issuing sales invoices allow customers to have an alibi for delaying payments, and you must ensure that invoices are issued on the date of sale. Even timely payments will take a few extra days to reflect in your account.
Beware of bad debts
Be careful in choosing customers by judging their reliability in making timely payments, or else heavy outstanding payments would severely affect your cash flow. They might even stall the business operations or slow it down. The biggest risk is customers going bankrupt with huge outstanding payments.
Minimizing bad debts is a step towards effective cash management, which you must complement with better business management.
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