Accounting for Entrepreneurs

Managing Cash Flow in a Small Enterprise

Written by Samuel Muriithi for Gaebler Ventures

While many businesses go under for lack of customers and for a consistent inability to make useful profits, there is a third reason for business downfall that lurks behind the two. This reason is negative cash flow and it is that situation where a business' operation costs are always greater than the payments being received.

New small enterprises are amongst the business ventures that are most prone to cash flow problems thanks in part to the inexperience of the business owner.

Cash flow problems are usually brought about by the actions of customers who acquire products/services and make a commitment to settle the bills but fail to honor their word in the said timeframe. Worse still, they may fail to pay at all. It is a fact of business that some customers will always ask for credit a business owner you can't wave all of them away but you really have to be cautious about taking unnecessary risks.

The first activity in managing cash flow in a small enterprise or otherwise is to make an investigation into just who you are dealing with. It is quite impossible to determine this through any other way apart from offering the credit terms requested for. For customers who need credit for relatively small purchases and seem to be honest enough just trust what your instincts tell you and decide whether or not to give the product/service on credit.

On the other hand, customers who require hefty credit terms need to be treated with more caution. Effective cash flow management practices will require you to ask them for three credible references. These normally include a letter from the customer's bank confirming his creditworthiness and two letters from other businesses that have successfully offered credit to the customer before. An honest customer will have no problem with this but you should be careful to ascertain that the three letters are genuine.

Secondly, cash flow management requires that a business makes the required effort to collect all the monies owed to it on time, i.e. as soon as the credit window lapses. Most credit terms are good for 15 or 30 days. A business must ensure that the requisite invoices for goods delivered or supplied are produced and disbursed in good time such that the recipients will have no excuse but to pay up upon the expiry of the credit window. Proper cash flow management needs you to stand firm with these deadlines lest unethical businesses take advantage of your mild approach to such issues.

A proactive entrepreneur will seek to develop approaches that will incentivize the customers to settle their bills early, much earlier than the indicated terms of credit actually are. Doing so adds an innovative twist to cash flow management. You can guarantee such customers of slight discounts when they make full payments in half the time provided by the credit window.

Cash flow management is certainly not easy, especially when you have to deal with stubborn customers who decide not to pay up despite your constant inquiries. For such customers the only solution may lie in pursuing legal redress.

Samuel Muriithi is a business owner in Nairobi, Kenya. He has extensive international business experience in the United States and India.

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