Over the last year or so, we have published a number of blog posts discussing business cash flow and its relationship to accounts receivable factoring. This is another such post. However, we want to take a look at the topic from a different angle: the concept of good cash health.
Good cash health involves more than just maintaining stable cash flow. Cash health is a concept based on cash coming in, cash going out, how cash is spent, its sources, and other factors. It describes the overall condition of a company’s cash position.
One of the things we do in our business of factoring A/R is help businesses improve their overall cash health. And once it is where a client wants it to be, we help them maintain that same level of cash health over the long term.
Maintain a Reserve Account
There are a number of best practices companies can employ to maintain good cash health. The first is maintaining a reserve account. A reserve account is a separate cash account through which companies save for future expenses. It is the business equivalent of consumer saving. It serves the exact same purpose.
Maintaining a reserve account preserves cash for unexpected expenses. It makes it easier for a company to maintain stable cash flow during temporary downturns. There really are no downsides to this practice.
Practice Early Billing
Data from 2019 showed that 33% of U.S. small businesses had in excess of $20,000 in outstanding invoices. That is a lot of money tied up in unpaid bills. One of the ways to address the issue is to get into the practice of early billing.
When services are rendered, present the bill with those services. Do not wait until the end of the week to create and send invoices. And definitely do not wait two or three weeks. Handing invoices to customers at the time of service makes it clear that you want to be paid on time.
Incentivize Early Payments
You can increase the number of customers who pay on time by incentivizing early payment. One suggestion for doing so is to offer an early payment discount. It doesn’t have to be much. Even saving 1-2% is enough to motivate some small businesses to take care of their invoices right away.
Avoid Asset Clutter
Certain types of businesses tend to accumulate asset clutter. What is asset clutter? It is that collection of equipment, supplies, real property, etc. that remains unused month after month. It amounts to overhead. And as you know, overhead ties up cash that could be used for other things. Any business with asset clutter should consider liquidating the unused assets.
Be Careful About Debt
It is nearly impossible to run a business these days without taking on at least some debt. But maintaining good cash health requires being careful about it. If new debt is not necessary for growth or maintenance, it should be avoided. Debt for debt’s sake becomes a weight that drags a business down.
Be Creative with Financing
When external financing is necessary, be creative about it. Bank loans are not always the best option. In fact, account receivable financing is often a better choice when a company’s short-term needs aren’t likely to become long-term propositions. Accounts receivable financing provides access to quick cash through invoice factoring.
There are other best practices for maintaining good cash health in a small business setting. Perhaps we will discuss them in a future post. For now, there is enough here to get you started on the road toward improving your own cash position.