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Posted by: Charles P Myrick CPA Posted on: Jun 28 2016 Posted in: cash flow management, credit policies

How Small Businesses Use Credit Policies to Improve Cash Flows

Do your credit policies improve the cash flow management of your small business? Sound credit policies are high on the list of business processes that improve your profitiblility. Small business owners will find it worth while to regularly review their company's credit policies. Here are five good practices to look for:
1. Check credit history. Don't be so eager to sign on new customers that you neglect to check out their credit history. Take the time to check references, and obtain a credit report to see how they've handled other financial transactions.

2. Establish and publish your collection policies. Follow up promptly on delinquent accounts. The more overdue accounts become, the more likely they are to become uncollectable. The better your cash flow management, the more solid your assets.

3. Calculate the cost of providing credit for your customers. For example, if your business generates $1,000 per day in credit sales, and it takes you an average of 60 days to collect, your cost of providing credit to your customers is $3,000 per year. This example assumes you can borrow money at 5% interest. By speeding up the average collection to 30 days, you cut your carrying costs by half.

4. Speed up collection cycles. Invoice customers when you ship the goods rather than on a monthly basis. Make sure your invoice clearly shows your payment terms, including penalties for late payment and a discount, if any, for prompt payment.

5. Become familiar with the payment cycles for your industry. For example, if contractors typically pay their bills by the 10th of the month, make sure your invoices arrive in plenty of time for them to process your payment.

If your small business credit card policy don't include these five practices, contact a professional CPA to talk about process improvement tools that can help you maintain optimal cash flows. 

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For accurate record-keeping and reporting, cash flow management, and support on initial accounting setup,contact Charles P Myrick, CPA. Recognized as one of Washington DC’s top accounting firms for small businesses, we can help set up the systems that will move your small business to success. (202) 789-8898