You wonder how they do it. Those businesses who seem to be fine even when sales are slow. I will tell you how they do it. They follow a solid financial plan and they monitor and alter it often. Yes, it takes work and diligence. It doesn't just happen.
If you want to make sure your income is steady, you must practice careful Accounts Receivable management. Issue invoices promptly, and follow up promptly. Don't allow outstanding invoices to become the norm. You can even offer a discount for early payments so your customers will have an incentive to pay. Your invoices must clearly state your payment terms and then you need to be actively enforcing them.
Your Account Receivable Turnover is the number of times per year that a business collects it's average accounts receivables. The higher your ratio, the more efficient your business is at collecting money. In most cases you want to keep your payments within 30 days.
How can you calculate your Account Receivable Turnover? Take your total credit sales for a year from the Income Statement (often times called the P&L). Divide that number by the accounts receivables. If you don't separate your credit sales from cash sales, you will need to use the total sales, which isn't as accurate. This will give you the number of times you received payments through the year. To find your average number of days it takes your customers to pay their bills, divide the number of times you received payments by 365.
If you find that your AR Turnover is low, you need to make some changes to your Accounts Receivable policies. When your AR payments are late, you are unable to make payments for your own bills!
It is also very important to keep up with your own bill payments. Pay your bills carefully and with purpose. Bills that have a 30 day term can wait the full 30 days so you have the time to build up the cash. Watch your cash flow carefully over that 30 days, so you can best decide when to make the payment. Take advantage of those pay early discounts also! Anytime you can save a few bucks you should do so.
Now, how do you survive and even THRIVE during the "lean" times? You create and follow a Financial Success Roadmap (budget). Budget isn't a bad word. A budget is just a plan to spend money carefully. If you do it right, a budget will help you achieve financial success. Build up cash reserves during your prosperous times so that it will be available to you when you need it. It is wise to save up at least 3 months worth of essential bill payments. It is even better to save up 6 months worth. Start small, though. Save enough for one month and then add on to it whenever you can. If your sales slow down for a while, you will have nothing to worry about.
Please contact me if you would like help setting up your own Financial Success Roadmap! I will help you put it together and monitor your progress throughout the year. That is just one of the services I offer. Ask how I can help you!
Ashley Reina
Owner Blue Skies Bookkeeping, LLC