Improving your cash flow
All small business owners should aim to have more money coming in than going out. From shortening your cash cycles to managing debt, several methods exist 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.
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 consumer products or services where you don't get it unless you pay immediately. But for any business-to-business product or service, you'll usually invoice and then wait for payment.
- 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 until 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 ten days of an invoice date. A discount of around two percent for payment within ten days could be an effective option that won't leave you 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. Make a note to re-negotiate prices with major suppliers yearly, and be aware of how smaller costs (phone, internet) can either slowly creep up over time or if there are better deals to be had.
- Reassess and increase pricing where you can. It can be 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 determine the actual price tolerance the target market has for your product or service and their alternative choices.
Costs and pricing strategies are the fundamentals; once you've taken action for each, you can look at other ways to improve your cash flow.
See if you can delay payments
Don't avoid your creditors if you're having trouble paying your bills. Be upfront 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 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 minimize 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 does your staff).
- Put sound 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 submitted 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.
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 your sales aren't what you'd hoped for.
While profits help your business realize its financial goals, having a strong cash flow means you've got what you need to keep operating and have cash to reinvest in business growth.
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