Most small business owners would say, they live or die by cash flow, but sadly, so few businesses have a good process for forecasting cash flow.

Companies such as Sage offer canned packages, but the best cash flow management tool is going to be the one customized to the needs of the business and it doesn’t have to be complicated.  The first step is to identify the sources of company data available to you.  Most of what is needed can be found in the accounting department, including accounts receivable and accounts payable aging schedules.

The next step is to identify cash inflows and cash outflows.  Cash inflows are cash receipts, collections from customers and refunds.  Cash outflows are payroll, insurance, office supplies and inventory, to name a few.  The type of operation will drive the types of inflows and outflows.  The majority of costs for a service business will likely be labor related, whereas, a product centered business will have inventory costs.

When constructing your analysis, remember that your focus is on cash, so start with the reconciled cash balance and forecast out in a frequency that matches your accounts payable cycle.  For instance, if you pay bills every week, forecast out in weekly increments.  If you pay every two weeks, forecast in two week increments.  Add the cash inflows and subtract the cash outflows for each expected increment.  If you’re short in the forecast for any given week, you’ll need to make adjustments, such as stepping up collection efforts now to shore up the anticipated shortage. 

Don’t forget annual and semi-annual payments for expenses such as insurance and software.  One of the biggest advantages to cash forecasting is to be able to plan ahead for these larger expenses.  Cash flow forecasting is an opportunity to review the inflow and outflow patterns of the business, which may end up exposing areas in need of improvement such as the collection policies and procedures of the business.

Slow collections can cripple the cash flow of a small business.  Few people like to ask for money, but there are some ways to speed up the collection process without being obnoxious.

First, consider offering terms, such as 1% or 2%, net 10.  Such terms allow the vendor to take a discount of one or two percent if they pay within 10 days of the invoice date.  Beware though, some vendors will take the discount AND pay slow, so this policy may require discretion. 

Second, get in the habit of sending statements or gentle email reminders on open invoices.  At 30 days passed invoicing, resend a copy of the invoice with a note that the invoice is still outstanding and ask if there are any questions.  This is good customer service, is a gentle way to let the customer know you are still waiting on payment, and puts your invoice back on the top of the stack.

Third, encourage your accounting or bookkeeping staff to develop a relationship with their vendor counterparts.  People naturally favor people they know and like.  If you’re on a first name basis with your customer’s accounts payable clerk, your bills are more likely to get paid before someone else’s, especially if there’s a cash crunch on the vendor side.  Sending periodic holiday greeting cards throughout the year is a low cost way to nurture long distance relationships and encourage familiarity.

Taking credit applications up front and checking references is a good way to avoid problems before they get started.  Plan to address credit requests quickly to mitigate customer complaints about the application process and be mindful not to tighten credit policies to the point they negatively effect sales.

If you want to take a more assertive approach to collections, consider having an attorney draft a form letter outlining your companies collection process and have it handy to be included with statements to the slowest paying customers.