For most small- to medium-sized businesses, cash flow is one of the biggest worries. It’s nerve-wracking to follow the ups and downs of income and expenses, wondering if you’re going to run short or be able to cover the bills. What if that client doesn’t pay you before you need to pay employees? What if you have to pay for a big shipment before the rent is due?
You may want to get a line of credit from a bank to use in case of emergencies. Having cash in reserve, however, is important for times when you need it, and there are things you can do to bring in extra cash and reduce the chances of running short.
Here are five ideas to help you improve your business cash flow and build up a reserve:
- Progress billing
Depending on your business and the work you do, you may find it convenient to bill projects in stages or upon completion of set milestones. That way, you’ll be paid as you go and be secure in the knowledge that money is coming in regularly. Plus, if a client is late in paying you (or doesn’t pay you at all), you won’t have lost additional time or money as you can hold off on doing more work until receipt of payment.
- Review your inventory
Do some products sit on the shelf for months collecting dust? If items aren’t moving, they’re tying up cash by lying around in storage. Find the time to go through what you have, determine what moves and what doesn’t, sell off things that sit around (even if at a discount) and replace them with products that are more popular.
- Reward fast payments
Many businesses have a 30-day payment period, but you can offer clients a deal for paying you more quickly. Consider giving customers a 2% discount (or an amount you choose) for paying invoices within 10 business days. This option requires some additional work on the part of your accounting staff in order to keep track of who meets the deadlines and who doesn’t (and it can change from invoice to invoice), but it can make a difference for you while also rewarding your loyal customers.
- Review your debtors
Too often, businesses give their clients the impression that it’s OK to pay after the due date, by failing to follow up late payers. Well, it’s not OK. Don’t send out overdue statements with 30-day, 60-day, or 90+ day references – if it’s late it’s late. Otherwise your customers will think you are allowing them even more time to pay! Review your aged debtors frequently. If you’re struggling, employ the services of a fee funding facility or in the worst cases, a debt collector. It’s not OK for you to fund other businesses by allowing them to extend payments. Keep them honest and you will be surprised how your cash flow could improve.
- Explore new tools and technologies
This suggestion may sound counterintuitive at first because it takes money to buy new equipment and software. However, if machinery regularly breaks down or you’re using outdated computer programs, you could be losing both time and money. See if there are better, more reliable options available that could help create efficiencies and streamline processes.
The importance of clear information
If you don’t have a clear picture, you can’t make important decisions. A cashflow forecast is a vital business tool in managing your cashflow. It helps you to understand where your money is going, and the impact of late payments. It also gives you clear information on whether or not you can afford capital expenditure, or your own debt obligations.
If you’re not already preparing them, you should also consider monthly or quarterly Key Performance Indicator (KPI) Reports. These provide up-to-date information on numerous business indicators, including debtor days and cashflow. Tracking performance more effectively allows you to take action early – which is critical when managing your cashflow.