Every owner of small or medium-sized businesses will face concerns about cash flow, either frequently or from time to time. As your income fluctuates – and expenses too – you can end up crossing fingers that a supplier will pay in time for you to meet your commitments.
Banks are always there to help with some emergencies. But it’s good to make sure you have your own resources in reserve. There are five especially important steps you can take to make sure your cash flow remains in glowing health.
1. Bill in stages
If your business activity suits interim billing, it’s an important way to both reduce your business risks and boost cash flow. As you finish set milestones, you can be paid along the way. It means more regular income and confidence that a client can’t go under while owing you a game-changing amount of money.
2. Control inventory
Anything that sits on a shelf is costing you money. It’s important to keep a close eye on what your business is actually using and to make arrangements that mean you can buy new supplies more quickly if needed. You’ll save on storage costs and also have more money in the bank. Do a sanity check, which might even mean selling off some surplus (even if you have to offer a discount). Make sure, too, that you’re focusing on popular/frequently needed inventory items.
3. Reward fast payment
You may well have a default 30-day payment period, but that doesn’t prevent you making it worthwhile for clients to pay sooner. For example, you could offer a discount (perhaps 2%) when an invoice is paid within 7 or 10 business days. Of course, you’ll need to be sure that your own accounts department is on top of the details to make this a viable option, but it’s effective for cash flow and it also rewards good customers.
4. Chase due dates
An obvious step, but surprisingly large numbers of businesses allow things to drift and give their clients an impression that any time will do. It’s important to chase early, not after 60 days on a 30-day invoice (a habit that over time will make 60 days the new default for your business). If you need to, employ a fee funding facility, or a debt collector when things are going seriously astray. It’s not your job to fund their business!
5. Use the right tools
New technology is always coming along to help with all of this. By making an investment (not necessarily huge) in new equipment and software can avoid the serious impacts of unreliable or slow systems. Check out the options and find the right solution for your own operation.
Finally, establishing a clear picture of where your business is right now is essential. It’s the basis of all the important decisions you need to make.
Consider putting together a cash flow forecast, so you know where your money is going, and how much you are being affected by late payments. This will also inform more strategic investment decisions, and avoid falling foul of your own problems with debt.
If you don’t have them already, monthly or quarterly Key Performance Indicator (KPI) reports are definitely worth considering. They show you information such as debtor days and cash flow and enabling prompt action.
Getting your finances in order can be easier with a reputable business adviser. Accru can help you to create a strategic plan, explore expenses and discuss potential sources of additional revenue. Contact your local Accru office today if you have questions about improving your cash flow.
