Many Oklahoma small businesses operate in a B2B (Business to Business) environment. Often times the vendor or provider is a small business while the customer is a large business. These larger businesses may demand payment terms of 30, 60 or even 90 days. This means the small business will be paid up to 90 days after the delivery of their
products and services.
Let’s have a look at the effects to cash flow considering 30 and 60-day payment terms. Everything in this simple example is the same, with the exception of the payment terms.
30-Day Terms
| Month | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Begin Cash | 0 | (50) | (25) | 50 | 100 |
| Receipts | 0 | 100 | 150 | 150 | 200 |
| Deliveries | 100 | 150 | 150 | 200 | 200 |
| Costs | (50) | (75) | (75) | (100) | (100) |
| END Cash | (50) | (25) | 50 | 100 | 200 |
60-Day Terms
| Month | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Begin Cash | 0 | (50) | (125) | (100) | (50) |
| Receipts | 0 | 0 | 100 | 150 | 150 |
| Deliveries | 100 | 150 | 150 | 200 | 200 |
| Cost | (50) | (75) | (75) | (100) | (100) |
| END Cash | (50) | (125) | (100) | (50) | 0 |
As we can see, the effects are dramatic. With 30-day payment terms, ending cash is 200. With 60-day payment terms, ending cash is zero.
Certainly, there are other factors that affect cash flow. Factors like level of sales & receipts, changes in operating costs, taxes and capital expenditures.
Actions a Small Business Owner Can Take
The small business owner should make cash flow analysis part of their normal operations.
To learn more about cash flow, please read this blog that compares the income statement to the cash flow statement.
The small business owner should gain a full understanding or why cash is so important to their business.
To learn more about the importance of cash, please read this blog that discusses why cash is king!