The aim of all small business owners should be to have more money coming in than going out. From shortening your cash cycles to managing debt, there are several methods for getting on top of your cash flow. And once you’ve got it firmly in hand, you’ll experience greater freedom and opportunities to grow your business.
A healthy cash flow means you’ll have working capital to reinvest in your business and sustain its competitive edge.
Shorten your cash cycle
Your cash cycle is the time it takes from you doing the work, to getting paid. The shorter the time, the faster the cash comes into your business. The best-case scenario is you get paid immediately.
This works fine for businesses that sell to consumer products or services where unless you pay immediately, you don’t get it.
But for any business to business product or service you’ll usually invoice and then wait for payment.
You should;
- Try and get paid immediately by generating an invoice straight after a job has been completed so your customers can pay on the spot. And it means you’re not waiting till the end of the month for the cash to show up in your account.
- Encourage early payment – if you still need to invoice, do it early. Don’t wait for the end of the month. And provide incentives to your customers to encourage them to pay early. For example, some businesses offer a small discount for paying within 10 days of an invoice date. A discount of around two per cent for payment within 10 days could be an effective option that won’t leave you too out of pocket.
- Ask for deposits or pre-payments if you can, especially for larger pieces of work.
Improve your margin
The more margin the less you have to work to get the same result. Two of the best ways to generate a better margin are;
- Reassess and lower your costs. Regularly compare your budget with actual cost figures and frequently check the pricing offered by alternative suppliers. Schedule to yearly re-negotiate costs with major suppliers, and be aware how smaller costs (phone, internet) can either slowly creep up over time, or there are better deals to be had.
- Reassess and increase pricing where you can. It can be a bit scary to consider raising prices, but only if you assume your target market is price sensitive and your only goal is to be a price leader. Market research will help you work out the actual price tolerance the target market has for your product or service and what their alternative choices are.
Costs and pricing strategies are the fundamentals; once you’ve taken action for each, you can then look at other ways to improve your cash flow.
See if you can delay payments
If you’re having trouble paying your bills, don’t avoid your creditors. Be upfront with them and work with them to figure out ways to pay your debts more easily. In most cases they’ll do what they can to help you, just as you would if one of your customers had trouble in paying by the deadline, such as;
- A repayment schedule over a longer period
- Pay monthly retainers or part payments as you go
Reduce the chance of bad debts
Offering credit is often convenient and can help retain your best clients – but make sure you limit all the potential hassles and risks that can go with it.
Keep these considerations in mind:
- Always have customers sign your credit policy– it doesn’t matter how trustworthy you think your customers are, they still need to sign on the dotted line so that your terms and conditions are clear.
- Have minimum credit terms (under a certain $ amount customers must pay cash) and maximum credit terms (over a certain $ amount they must pay a portion in advance).
- Be aware of how to reduce the risk of fraud (and ensure so do your staff).
- Put good systems in place – set up a debt management calendar and keep on top of debtors with repeat meetings and reminders.
- Use accounting software to red flag late payers and follow up immediately. Pay close attention to large outstanding invoices as they draw near, and keep your ear to the ground about the financial health of your customers (especially if they’ve just raise a large order that places your business at risk if they fail to pay).
- Know your legal rights in collecting debt and get legal advice and consider collection agencies if the worst happens and the customer refuses to pay.
Summary
You’ve heard the saying “cash is king”, and there’s a good reason for that – without it a business can’t grow, secure financing or attract investors. A healthy cash flow also means your business is protected if you’re facing problems repaying a loan or if your sales aren’t what you’d hoped for.
While profits help your business achieve its financial goals, having a strong cash flow means you’ve got what you need to not only keep operating, but you’ll have cash to reinvest in business growth.