A positive cash flow is vital to the survival of your business. Finding yourself short on cash for unexpected expenses can literally lead to the demise of your business. Hopefully you already have a cash flow forecast and budget to avoid this – If so, well done! If not, read our article How to create a cash flow forecast.
Now, what if your cash flow forecast shows that predicted cash inflows won’t cover your outflows for a particular month? Then it’s time to look at ways to improve your cash flow, or perhaps set aside larger amounts of cash from the ‘good’ months to help with the seasonal expenses. Here are four strategies for cash flow problems to consider.
1. Improve revenue management
A steady revenue stream is the first step to manage cash, even before it reaches your bank account. Consider these ways to make your cash inflows more regular:
- Can you sell your products and services on a subscription-based model?
- Could your customers pre-pay or progress-pay some of their fees?
Some customers may even welcome these suggestions as they may help with their cashflow as well!
2. Incentivise upfront and cash payments
Another strategy is a discount incentive for upfront payments. Most of the time, giving a discount will be much cheaper than having to borrow money later when you’re short of funds.
Your invoices can feature discounts for cash payments too to reduce your EFTPOS fees.
You can also insist on payment at delivery, or payment before the goods are dispatched. This may not be suitable for every customer but you may be surprised at the reaction to a discount offer.
3. Reduce the time invoices are outstanding
Hiring a debt collector is a last resort and the cost is not desirable for a small business. If your collection activity is consistent, there will be much less stress and debt accumulated at the end. Here are two strategies:
- Make sure you regularly chase customers who are overdue – and start chasing earlier if you need to.
- If your ‘debtors’ are not meeting their obligations to you, you may need to reduce credit terms in your next transactions or renegotiate your prices. Let them know that payment is important to you before the debt accumulates
4. Avoid credit card and other high-interest debt
Finally, avoid traps on the credit side such as credit cards. Interest is expensive on credit cards once the interest free period has passed, so consider a business loan. It may not have rewards points but it will reduce your cash outflow compared to a credit card.
If you are currently experiencing debt, make sure you pay off the debts in order of highest interest rates, balanced with order of priority. For example, defaulting a bank loan can be more serious than paying a credit card (if you do end up with one).
Preventing cash flow problems
Business seasonality creates additional cash flow challenges. See strategies for dealing with seasonal cash flow problems in Experiencing business seasonality – no sweat!
A forecast of the net cash available monthly and annually helps with making many business decisions, such as when you can afford to fund growth, draw out cash, or conversely when you may need to tighten the reins or borrow to make payments. There are also non-budget related strategies you can use to manage the way cash comes in to your business. While it may not seem as urgent as replying to a customer email or ordering more stock, stopping to review and forecast your cash flow is a stitch in time that could save nine!
Accru assists clients with strategies for cash flow problems as part of our accounting and business advisory services. Please contact your local Accru advisor if we can help.
By Jessica Wille, Accru Felsers Sydney Accountants + Business Advisors