10 Simple Ways to Improve Cash Flow for Business
One of the most common issued faced by owners of small to medium businesses is cash flow. Your staff have to be paid, the revenue have to be paid but your customers may have cash flow problems & it all filters into putting a lot of pressure onto your bank accounts. Your employees wont understand that you haven’t been paid on time so here are a few simple tips to help manage a tricky situation. Below are 10 simple tips to help ease the burden on your cash flow.
- Invoice on time
It is very important that your invoices go out on time. Some companies have scheduled payment runs & if your invoice isn’t in the list to be paid you are unfortunately waiting until the next payment run which may not be for another month. Perhaps you could consider emailing invoices instead of posting them. Most customers are happy to receive digital invoices & they will be delivered instantly & without the costs associated with stationery (& of course your time in packing the envelopes).
- Credit policies
There are two things to consider with credit policies. 1) – If they are applied will they meet your cash flow requirements & 2) – Are they being enforced.
It is very important to discuss with your customers what their credit terms are – especially with new customers. You don’t want them to start off on the wrong foot.
- Follow up on overdue payments
Make sure you let your customers know that they have overdue payments. You don’t want to let invoices become overdue for too long. It can make relationships with customers a little tense & they may think you only contact them to chase payments. Early follow up will help in dispute resolution also as events will be fresh in the mind.
- Offer early payment terms
This could be considered as part of point number 2 but it is a widely used technique to encourage customers for pay on time. With such an incentive, some customers will pay sooner rather than later. You could consider offering a trade discounts of around 1% – 2% off the total amount due if payment is received within a certain number of days. Although not the same thing you could also consider invoice discounting where you borrow a percentage of your sales ledger balances from a finance company. In both circumstances though you need to consider your margins to decide if it is financially feasible to reduce the margins by such percentages.
- Review expenses
Companies often use the same suppliers because they always have done so. There is nothing wrong with staying loyal to good suppliers but you should always be aware of what else is on the market. Apart from looking at who supplies you, you should also consider if all services or products are fundamental. Obviously you need to be careful not to cut spending for the sake of it or it can have an overall negative impact on cash flow if it reduces demand for your products i.e. reduction in advertising spend.
- Manage your stock levels
This is one key aspect of cash flow that is often overlooked. You will often get sales reps calling to your door at month end or quarter end offering discounts if you take items that you hadn’t originally ordered. On the face of it they might seem to be offering a great deal but you must consider how long it will take you to sell the items. Will you end up with obsolete stock? From a cash flow point of view every euro that is held in stock is not available to the rest of the business. Proper sales forecasting will help you determine what your inventory levels need to be & in an ideal world you should only hold stock that will be required to meet your near future sales requirements.
- Manage your supplier payments
Take the maximum allowed time to pay your suppliers without incurring any late payment fees. Perhaps you could try to negotiate longer credit terms with your supplier if you commit to future supplies.
- Prepare cash flow budget
Organize your billing schedule. This will help you understand where your cash flow is at the minute & where it is likely to go in the future. It is good practice to look at exactly where your cash is tied up & look at customers, suppliers & stock separately. A good forecast will highlight when there are going to be issues in the future & allow you to make preparations for them.
- Take advantage of early payment incentives
I mentioned in point 7 that you could stretch out all payments with suppliers to take the maximum amount of time to make the payments however the flip side of this is that some suppliers may offer very favorable early payment discounts. By taking advantage of these it may actually be more beneficial to cash flow in the long term.
- Consider leasing assets
Although leasing of assets will incur finance charges it will reduce the requirement for large upfront payments & allow you to put that money into growing the business. Many companies will finance cars, computer equipment etc.