Your financial report shows a big profit, yet your bank account’s running on empty, and the old jar of gherkins in the back of the cupboard is beginning to look mighty appealing. You don’t understand it, on paper everything appears to be going well, yet you’ve got no cash to show for it. Why, you may ask, well the main reason is you’ve failed to manage your cash flow properly.
A healthy cash flow is the lifeblood of any small business and is essential for growth and profitability. The key is to accelerate the inflow of money, while delaying the fiscal outflow by implementing written credit and collection policies.
To improve your small business cash flow consider the following:
1. Bill promptly; Ever find yourself so busy building your business and making deadlines that you don’t get around to billing regularly? You’re not alone; it’s a very common problem. It’s important to remember that your bills will not wait for you. So if you do not have a system in place start billing for projects on a regular basis NOW. Even when taking on long-term projects or clients try to negotiate billing in advance, opting for regular payment instead of allowing the amount payable to increase incrementally.
2. Offer discounts for prompt payment; Sometimes offering a discount for quick payment can significantly reduce the time spent waiting for payment. Given an incentive, many customers will opt to pay sooner rather than later. Trade discounts typically give 1% to 2% off the total amount due should customers pay within a designated time period, traditionally within 10 days.
3. Avoid slow/no pay customers from the start; The best way to avoid cash-flow problems caused by customers who delay or avoid payment, is to weed out those slow/no pays before they become clients. This is especially important with clients whose account is likely to become significant to your business. Thus, before adding to your clientele it’s important to do your homework. Request credit references and research relationships with past businesses, and unlike most institutions, actually follow up – time spent researching your clients for the good of your business is never time wasted. It may even be prudent to pay for a credit check from an organisation such as Experian or Dun & Bradstreet,
4. Seek better payment terms from suppliers; The simplest way to slow down a company’s cash flow outflow is to negotiate better payment term with suppliers. While most suppliers provide terms of 30 days, 60 or 90 day groupings are also available, though it may mean changing suppliers.
5. Consider consolidating your loans; Some small businesses have several different loan accounts, utilising each for different purposes within the business. Equipment loans, cars loans, a business line of credit and a business credit card, all aid small business in regulating cash flow.
6. Trim your inventory; Keep a tight control on inventory. The less cash is tied un in inventory by and large means a better cash flow. While some suppliers offer deeper discounts on volume purchases, if inventory sits on the shelf for too long, it ties up money that could be used more efficiently elsewhere.
If you have a cash flow problem that you feel is limiting your business, it is time to seek professional advice. Call our office on (02) 9299 7044 and talk to one of our advisers. A more efficient and affluent business is just a phone call away.