Cash flow – the lifeblood of any business. The aim of any business owner is to have more cash coming in than is going out. You’re in business to make money, and one of the most effective ways of doing this is to examine your cash flow and look for ways to improve it.
You’ll almost always find there are things you can do to improve your cash flow, from shortening your cash cycles to managing debt. The idea is for you to get on top of your cash flow because it means greater freedom and opportunities to grow your business. A healthy cash flow means you’ll have more working capital to reinvest in your business and sustain its competitive edge.
Understanding and shortening your cash cycles
It’s important to understand what kind of cycle your business is on. For instance, are you like a hairdresser, that sees cash coming in daily, or are you more like an orchardist, on a seasonal cycle that sees fluctuating sales during winter and summer?
What you don’t want are lengthy periods of time when your business goes without cash. They can lead to all sorts of problems from paying your creditors to keeping operations going. So you need to find ways to shorten your cash cycles, and we’ve got some tips for you:
- Try to be paid on the spot – offering your customers mobile payment options is a great way to get immediately. And it means you’re not waiting till the end of the month for the cash to show up in your account. Because let’s face it – money in the bank’s more useful to you than a check in the mail.
- 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.
- Don’t skip credit checks – this is especially important if you are still invoicing. It’s important to do your homework and check up on your customers, so you can be sure you’re allowing only reliable customers to have credit.
Improving cash flow
Once you’ve got to grips with your business cycle, and with your cash flow, it’s time to learn how to improve it.
Set a cash goal
Before you do anything else, you need to know how much working capital you need either to right the ship or to take your business where you want to. If you can’t measure your progress, you’re less likely to succeed in your goals, so carry out a costs analysis and use break-even calculations to establish what needs to be achieved and by when.
When it comes to how to improve your cash flow, consider some of these tried-and-true methods:
- Reducing costs – review your business and look at ways you can cut costs, such as exploring different energy provider options, getting rid of outdated and unused equipment, using technology to streamline processes, and outsourcing time-consuming tasks such as payroll. Remember that costs slowly creep up over time, so you need to regularly compare your budget with actual cost figures and see if you can reduce them.
- Review your pricing – it might be time to increase your prices, as it widens your margins and frees up cash for business growth. You should always be seeking to increase your prices over time so that you can improve your profit margins and keep up with inflation.
- Talk to your creditors – the absolute worst thing you can do if you’re facing difficulties paying your bills is to bury your head in the sand. Instead, be upfront with your creditors and work with them so that you can pay off your debts efficiently.
- Manage debts – if your customers owe you money, the faster you’re able to obtain it using effective collection tactics, the better. Ideally, you want to reduce the chance of bad debts and pressure on your business’s cash flow.
- Become more streamlined and efficient – there’s lots of technology out there designed to streamline your business processes and make them more efficient, so you might as well make use of them. In fact, you’d be remiss not to. For instance, you can cut down on travel costs by using Skype instead.
Summary
What it all boils down to is common sense. You’re looking to find ways to have more cash coming into your business than going out. However, if you’ve reviewed your business and found that these tips aren’t having much effect, it’s probably time to talk to your accountant or bank manager about ways to bring your cash flow problems into line.