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How Small-Business Owners Can Help Cork Cashflow Problems

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Originally published on Forbes.com.

Nick Chandi is the CEO of ForwardAI, which offers easy, versatile business data access and analysis for banks, lenders and fintechs.

Launching your own business can be rewarding, but frustrating and scary at the same time, especially with today’s supply chain challenges and inflation. Running a business also comes with additional expenses that founders may not consider in detail when they first launch, like office space, furniture, supplies, utility bills, subscription, registration, delivery fees and more. As businesses scale, costs scale.

If you’re not actively collecting payment on your invoices, someone is bound to get the short end of the stick, whether that’s you, your employees, vendors or customers. Unfortunately, a lot of small and medium-sized businesses (SMBs) struggle with cash flow because they fail to collect invoices. Data from 2017 shows that about 64% of SMBs surveyed suffered from delinquent payments and unpaid invoices across U.S.-based SMBs, totaling $825 billion at the time. Without cash in the bank, owners can’t make a lot of major business decisions, like buying inventory, hiring new employees, investing in equipment or making critical repairs, all of which can severely impact operations. In many such cases, owners can’t even afford to pay themselves.

Traditional payment methods also compound cash flow issues. Checks are the most common business-to-business (B2B) means of payment, with 81% of businesses paying other firms via paper checks. But checks can take 90 days to pay on average and cost anywhere between $12 to $30. Even automated clearing house (ACH) payments take up to seven days to clear. In today’s volatile economic world, owners don’t always have the time to wait 90 or even seven days for settlements. They risk losing their whole business waiting on an unpaid invoice, which contributes to a quarter of bankruptcies.

Founders struggling with cash flow management can improve their invoicing stream by collecting payments upfront, invoicing promptly and establishing a “net 30” schedule that speeds up the payments life cycle. Owners can even offer discounts on early payment—but be sure to build the difference into the cost of your products and services. These fixes are a start, but it’s also important to consider the clarity of your visibility into your finances. It can be easy to find yourself in a position where you don’t know what you don’t have or when you will have it.

Owners interested in having a bird’s-eye view of their funds should consider investing in a cash flow forecasting and management tool to track expenses and receipts and predict future financial performance. A good system will allow owners to take proactive steps to manage cash flow. For example, consider that payroll needs to be pre-funded seven days in advance of when it’s due. A helpful system will assist in predicting your cash flow in order to see what bills you need to hold and what invoices you need to collect before you can comfortably fund payroll and pay your employees.

It’s a particularly handy tool considering how seasonal some businesses are, especially in the hospitality sector. A forecasting and management platform that fits your seasonal business will help you stock ahead of time or find it on sale, and can help onboard employees without depending on the income they generate from holiday sales or running out of cash because it was poorly managed.

SMB founders can also consider expanding their payment methods from basic checks, and accommodate various customer and supplier payment methods to speed up settlements and stabilize cash flow. Founders can also ask their banks whether they offer real-time payments via the RTP network so SMBs can get paid in real time and access features like request-to-pay, which can significantly shorten the payments life cycle and reduce risks for banks and businesses, given that the money is irrevocably transferred in real time.

Real-time payments have soared over the last few years, and India and China have taken the lead globally, with instant transactions of $25 billion and $15 billion, respectively. By contrast, the U.S. made just $1.22 billion in 2021. Right now, over 250 financial institutions reach about 61% of demand deposit accounts on the RTP network, the premier real-time payments system in the U.S. FedNow, the Federal Reserve Banks’ instant payment service, is also expected to launch next year, so there’s plenty of opportunity for further growth and widespread adoption as more instant payment avenues become available.

Most U.S. businesses expect to be able to send and receive instant payments by 2023. For many, there’s a real “pent-up” demand, with nearly half of all businesses surveyed interested in using RTP for recurring or ad hoc bill pay. For SMBs, there are actions to take now to help improve cash flow management that require no additional technology. When appropriate, the use case for instant payments is clear—pay quickly and get paid quickly to help improve or maintain a steady cash flow.

 

Originally published on Forbes.com.

 

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