How to Balance Accounts Receivable With Accounts Payable
Every business has its own unique set of goals and objectives, but if there is one common theme among them, it is maximizing cash flow. Simply put, the more cash flow a company tends to have, the more profitable it usually is.
At its basest form, managing cash flow is accomplished by having more money coming into the organization than money going out. This might sound simple, but many new entrepreneurs find out all too often just how difficult it is to balance their accounts receivable with their accounts payable. As such, here are ten tips you can use to help you manage, protect, and even improve your startup’s cash flow.
1. Create a Rock-Solid Accounts Receivable Process
One of the most important things a startup can consider doing is to put into action a rock-solid accounts receivable process from the start. Doing so should help increase your ability to track and manage your company assets, including your invoices and inbound revenue.
2. Create a Credit Policy
If you are considering extending credit to your customers or clients, then you should consider having a credit policy in place before you even make your first sale. Before your business opens its doors, you should try to have your billing terms, acceptable payment forms, interest charges, and credit check process set in stone.
3. Create Clear Invoices
One of the most common reasons why invoices go unpaid is because they can sometimes be confusing and hard to understand. Therefore, creating clear invoices using easy-to-understand language and defined payment terms can be essential to getting them paid on time.
4. Require Partial Payment Upfront for Larger Orders
If you are contracted to provide a large order or you take on a time-consuming project for a client, then you should consider requiring a partial payment upfront to help protect your business. The terms should also require full payment of the remainder upon the completion of the job.
5. Only Pay Bills When You Must, Unless…
The longer you hold on to your cash, in theory, the more you will have for your business, so consider paying your bills by the due date and not earlier. Of course, this is unless you can negotiate a discount on your invoice if you pay your balance before its due date. Another reason to pay your bills early is that by doing so you might be able to positively influence your D&B PAYDEX® score and by extension, help improve your business credit file.
6. Pay Business Credit Card Balances Off Every Month
Business credit cards can provide purchasing convenience, but their interest rates can have you paying extra. To prevent accruing high interest charges, consider making it a habit to pay off your entire credit card balance by the due date every month.
7. Negotiate With Vendors and Suppliers
Most businesses grant 30 day terms, but by negotiating with your vendors and suppliers, you may be able to get your terms extended to 60 or even 90 days. This can keep cash in your business longer, and can allow you more flexibility when managing your other accounts payable.
8. Create an Incoming/Outgoing Budget
Creating an incoming and outgoing budget may help you notice any upcoming cash flow fluctuations earlier than you otherwise would and allow you time to prepare financially for a decline in your accounts receivable. Of course, inbound funds are almost never guaranteed to come in on time, but scheduling out your expenses and anticipated payments in a viewable format could help you immensely.
9. Adjust Your Pricing Structure if Necessary
If your startup is selling its products or services successfully, but is struggling to make ends meet every month, then you may be charging too little for your products. Or, if you are not selling enough, then your pricing structure may be too high. Making adjustments to the pricing structure either way may resolve the issue, and help strengthen your cash flow.
10. Perform Cash Flow Projections
Cash flow projections and other types of financial projections are never guaranteed to be accurate, but they can help you anticipate different scenarios so you can take action before the company’s cash flow suffers. For instance, how would your business fare if it lost X% of your customers? Performing cash flow projections can help give you the leverage you need to be in a better position to react to such situations.