A healthy cash flow is vital to reducing stress for busy business owners and to building a successful company. As you grow, ensuring a steady stream of cash that supports your marketing, customer service, and inventory needs will be one of the business factors you focus on the most.
The concept of cash flow is fairly simple: your business uses cash to create goods or services for your customers, and you collect the cash back (with a mark-up!) from those customers. The cycle of cash flowing in and out is tracked using a Cash Flow Statement. Managing your cash flow is the key to sustainable growth over the long term, so here are a few tips that will have you handling your cash flow.
Tip 1 - Invoice Promptly
Many small businesses have a regular billing routine such as invoicing clients and/or customers at the end of the month - leaving money that could be sitting in their bank accounts improving their cash flow in someone else's pockets! Instead of waiting to invoice, bill right away when the job is completed. If your business involves billing for hours of time, invoice twice monthly instead of once to get some of your money coming in sooner.
Another option is to require a down payment on projects so that your customers fund the project, not you. Ask for partial payment up front - ask for a percentage of the bill to be paid before the work starts. For instance, you might charge 40% of the bill as a retainer or proof of good faith with the remainder due on completion of the task. Or break the bill into thirds, asking for a third before work starts, a third while the project is ongoing and a third upon completion. It's a common business practice and one you should be taking advantage of if you can.
Tip 2 - Getting paid quickly
Creating and sending invoices, especially in a complex business, is almost always time consuming and challenging. Systemising this process, creating a tracking system, and keeping up with the task will make a big difference in your cash flow. Setting clear expectations with your customers for how often and how much invoices will be is another key piece to getting paid quickly. Fortunately, software like Xero helps by automating the invoicing process, creating a paper trail so you can track invoices, and allowing customers to pay online. The easier you make it for clients to pay, the better your cash flow will be!
Follow up on overdue accounts. The longer your invoices are left outstanding, the less likely your are to collect. Managing debtors and having good credit policies will keep your cash coming in. Have a collection process in place, and follow through. A good rule of thumb is that you should always have a due date on your invoice and then send a follow up statement if unpaid after this due date. If you haven't received payment within 45 days of the due date, a follow up phone call should be made.
Tip 3 - Negotiate with Suppliers
You may also be able to negotiate longer payment terms with your suppliers. If you can get payment from your customers before you pay your suppliers, you will have zero out of pocket.
Lots of suppliers have payment terms that allow you to delay the payment until end of the month or maybe even up to 60 days. This allows you a little float time to use their money while you are working on your project. Then hopefully you'll receive payment from your customers prior to needing to pay for the products you purchased.
Tip 4 - Using Debt
No one likes the idea of debt, but borrowing money is a normal part of doing business. Unlike in personal savings, businesses often need to borrow in order to take advantage of opportunity and grow.
Borrowing is a risk, but if you do your due diligence and research your financial situation properly, you will be confident that your return on investment will cover the debt and more. And if your plan goes wrong, you'll be prepared to compensate.