When you first start your business, you might aspire to join the ranks of business owners who never have to worry about their cash flow. However, the reality is that you'll probably spend a lot of time over your first few years worrying about something that entrepreneurs call "lumpy money."
How can you tell if you suffer from lumpy money syndrome? The symptoms are pretty straightforward; you feel like king of the world when a handful of clients pay their bills at the beginning of the month. But by the time the 28th rolls around, you find yourself scrounging through the couch cushions for loose change. If this sounds all-too familiar, these five tips can help inoculate you from lumpy money syndrome.
5 Tips to Better Cash Flow
1. Get more cash up front
The recession changed a lot of social norms about how we do business. It's no longer considered such a fatal flaw to ask for a retainer or a down payment at the start of a large order. Use that cash to buffer your expenses until you complete the project.
2. Accept credit cards
Although many small business owners gripe about credit card processing fees, paying a small percent up front can beat waiting 60 or 90 days for a customer's payment. Let the bank be the bank, so you can focus on running your business.
3. Use credit cards for rewards, not cash
According to the Small Business Association, only about one in 10 entrepreneurs rely on their credit cards for all of their startup capital. Instead of hunting for a business credit card with a big credit limit, look for a deal that lets you earn cash back on your most frequent expenses. Use that card to bridge the gap between your business expenses and your receivables.
4. Check your customers' credentials
Your line of work determines how likely you'll encounter slow-pay or no-pay clients. Potential problem clients often operate under new trade names, meaning that background checks and credit checks can come up clean. Check your prospect's personal reputation online, and don't be afraid to ask for references before extending trade terms. Frustrated vendors often post warnings on industry bulletin boards about repeat offenders.
5. Automate your accounting
Successful business owners trap themselves into lumpy money cycles when they don't have enough time to handle basic invoicing and account management tasks. Online tools can automatically mail hard copy invoices, accept credit card payments, and even assign telephone reps to contact customers with outstanding balances. Moving to a real-time invoicing system spreads your income throughout the month.
Once you master the art of managing your receivables, you may even be able to start paying yourself a routine salary instead of scrambling for every last cent at the start of each month.
Joe Taylor Jr. has covered personal finance and business for more than two decades. His work has been featured on NPR, CNBC, Financial Times Television, Fox Business, and ABC News. He recently completed a personal finance book entitled The Rogue Guide to Credit Cards; (Rogue Guide Books, 2012).
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