The New Rules of Finance

From AmericanExpress

Today’s business environment doesn’t allow for any weaknesses in your financial management systems. Entrepreneurs must be on top of their game to make, and grow, profits. You need to know where your money is coming from, collect it on time and stay ahead of the curve on any shortfalls — all while keeping an eye on the future.

These tips can help you to identify areas to improve your profitability.

Think Cash Flow
One of the differences between business owners who continually stay in the black and those who don’t is a laser focus on cash flow management. Ask any highly successful business owner about his or her tricks, and the majority will be about managing cash flow and maximizing profit. The current economy mandates that you focus your attention on keeping more cash on hand. Better cash flow management can help you meet payroll, reduce dependence on quick collections, absorb price increases and take advantage of opportunities to increase funds, such as offering discounts for faster payment.

Use New Tools
The demands on business owners have never been greater. Businesses have to promote themselves aggressively, satisfy customers, keep employees productive and review finances like clockwork. The good news is that an abundance of software tools are available for managing finances, from invoicing through tax filing. Smart business owners are taking advantage of these tools to improve accuracy, record-keeping, reporting and analysis, collection timing and many other financial tasks.

Avoid Risky Prospects
A customer who pays late — or not at all — can jeopardize your company’s finances. Current financial times don’t allow for any slow or non-paying customers. Check credit reports on every prospect with whom you are considering doing any significant amount of business. If you have any doubts, talk with their references about their payment histories. Walking away from a potential non-paying customer can be far better than taking the loss.

Talk Money Upfront
At the outset of a new customer relationship, it’s easy to focus on the excitement of a new project. However, this is the time to discuss payment terms so you can help avoid potential pitfalls. Explain when you will invoice, for what portion of the total and when you expect payment. Consider staggering your invoicing — for example 1/3 of the total upfront, 1/3 on a project milestone and 1/3 on project completion — so you don’t have to carry the entire expense of a project for its duration. And be sure to send invoices as soon as you can; don’t wait, for example, until the end of the month to send out all your invoices.

Have a Cushion
Sales go up and down, prices change and unanticipated expenses occur — that’s business. The way to survive these fluctuations is to have a cash reserve at all times. Most usefully, a cash cushion lets you ride out sudden price spikes or prolonged sales slowdowns. More strategically, a reserve enables you to seize growth opportunities — for example, a good price on inventory, equipment, real estate or even a competitive business. The amount you should keep in your reserve fund varies by business and industry, but you may want to strive for at least twice what you normally keep because companies are taking much longer to pay. You also may want to have a line of credit open with your financial institution.

Plan Ahead
Effective cash management requires planning ahead to determine how much money is coming in for each time period and what your expenses will be. That way, you can project potential cash shortfalls. This advance planning will provide you with the necessary time to tap financial resources or take steps to free up cash.

Check Your Pricing
The new economic era requires businesses to be creative about pricing. It’s not a great time to raise prices, but it is a good time to consider if they are set correctly. If you are getting price pushback from customers, this can actually be a good thing — it can mean you are not setting your prices too low. Be sure to check your competitors’ pricing to see if you are in the right ballpark.

Make It Easy for Customers to Pay
Be sure you accept the forms of payment your customers prefer — it may be checks, electronic funds transfer, or credit or debit cards. With the proliferation of payment options, it pays to stay on top of the vehicles your customers want to use.

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