*transcript formatted from original video (watch video for full version)
The biggest liability on most small business balance sheets is the accounts payable- your unpaid bills.
You need good systems in place with your accounts payable to make sure that at any point in time there’s an accurate listing of who you owe, how much you owe them, and when you owe it.
In managing those accounts payable, take advantage of terms your vendors are providing so you’re letting go of cash as slowly as possible.
Having good systems in place so all bills are entered as soon as they are received (or at least as soon as you’re aware of them) will allow you to manage the timing of when the money leaves.
Make sure you have the right kind of liabilities in place to finance assets.
For instance, let’s talk about a line of credit. Many small businesses get a line of credit because of seasonality in business. There may be peaks and valleys in the cashflow because of peaks and valleys in the revenue streams.
That’s where a line of credit comes in handy. You can finance those periods where there’s a shortage of cash flow and then in the periods of the high season when there’s a big cash inflow, you reduce that line of credit.
Don’t get into trouble by building up that line of credit and not paying it down in the cashflow rich time of the year.
It’s possible you’ll find yourself in trouble if the line of credit is used up. Many times bankers aren’t the best at recognizing that situation. Then they’ll take it and want to turn that line of credit into a term note to make sure that they’re getting some of the principal paid back over time.
One more thing regarding financing.
When you’re financing equipment, don’t finance a three year use of life on a piece of equipment with a five-year note. At the end of three years when you’re looking to replace that piece of equipment it will prevent you from having two years left on the note on paying off the debt.
Analyze your debt, make sure you’re using the right kind of debt for the right purposes, and manage your accounts payable.
Manage your short term debt so you’re letting go of cash as slowly as possible and enhancing your overall cash flow.
If you find value in what we just talked about, here’s the link to get our full cashflow management and improvement guide.