“If you truly want to be successful in business,” rich dad said, “cash-flow management is essential.”
Cash flow is to a business what blood is to the human body. Nothing can impact a business more dramatically than not being able to make payroll one Friday. Proper cash-flow management begins on the first day you start your business—and it never stops from there.
When Kim and I started The Rich Dad Company, we agreed that no purchase would be made if it were not justified by an increase in sales. In fact, we often chuckle about our strategy for increasing book sales early in 1998 so we could buy a $300 copy machine.
Our strategy worked, however, and by December of 1998 we were able to replace that $300 well-worn copy machine with a new $3,000 one. It was this attention to detail in the early stages of our business that set the tone for our success. And it will for you too.
Good cash-flow managers review their cash position daily, looking at cash sources and needs for the next week, month, and quarter. This allows them to plan for any large cash needs before they become cash crises.
Below are some cash-flow tips that will help you as you build your business.
#1 – Skip the paycheck
If you are starting a business just for the security of a paycheck, well, then you’re in the wrong business. That’s how employees operate.
Delay taking a salary until your business is generating cash flow from sales. In some cases, this may not be possible due to an extended development phase, but for most people it is possible. Your investors will be much more supportive if they see that you are sharing in the development process by “investing your time.”
Also, if possible, keep your full-time job and start your business part time. By delaying taking a salary, you can reinvest sales to help grow your business.
#2 – Get your due
When you do business with others, you deserve to get paid. Plain and simple. Your customers will do whatever they can to delay payments. After all, they have their own cash flow to worry about. So, it’s your job to make sure you collect.
Invoice your customers quickly upon shipment of goods or when services are provided. Require payment upfront until credit is established. Establish late payment penalties and minimum orders, and leverage technology like direct deposit or online payment to speed up the revenue stream.
#3 – Watch your expenses
Many businesses forget that a crucial part of cash flow is managing their own bill paying. Make sure you pay your bills promptly, and ask for extended payment terms up front. A supplier will usually extend credit for 30 to 90 days to a good customer who has established trustworthiness.
Also, keep your overhead to a minimum. Before purchasing something, set a goal to increase sales to justify the expense.
#4 – Set controls
It’s important to also establish good internal controls on the handling of cash. The people who record the cash receipts on the bank deposits should be different from those who post them to the accounts receivable and general ledger. Checks should be endorsed immediately “For Deposit Only.” The people authorized to sign checks should not prepare the vouchers or record the disbursements and post to the accounts payable and general ledger. And the person who reconciles the bank statements should have no regularly assigned functions related to cash receipts or cash disbursements.
#5 – Ask for help
Finally, all this may seem complicated, but each step of cash-flow management is crucial to the success of your business. So, don’t be afraid to ask for help. Call on your accountant, banker, and personal financial advisor for advice in structuring your cash-flow management systems.
By following these cash-flow tips, you will go a long way towards ensuring your business success.