As most business owners know, cash flow is the lifeblood of any business.
Andrew Graham, national head of business solutions, RSM Bird Cameron, said, “It doesn’t matter what line of business you are in, if you are waiting for payment from customers then you can’t pay your suppliers for more products to sell.
“It is critical that business owners have strategies in place to manage cash flow and ensure there is enough cash in the business to maintain it, and look at ways to grow.”
Twelve ways to improve cash flow
1. Consider giving discounts for payments upfront. Some businesses will have a discount window of a month that customers must pay within to receive the discount. This is easier to enforce than a penalty for late payment and is more attractive to customers.
2. Take deposits on products where possible. This ensures that some cash flow is generated upfront and also assists in locking the customers in to completing the transaction
3. Take as long as you can to pay your bills without incurring a late fee. If a supplier gives 30 days, then take the full 30 so that the cash remains in your business for as long as possible. Pay regular suppliers before others as early payments can generate goodwill and improve the likelihood of obtaining credit and hold off on other for the full payment term.
4. Invest surplus funds in a high-interest-bearing account or other financial vehicle. There’s no point having idle money in a business, but just make sure you can get your hands on it quickly if the need arises.
5. Create a cash flow forecast. Know when the money should come in, when it is likely to come in and when you will have to pay it out. Knowledge is power as it will help you prepare for the inevitable delays.
6. Issue your invoices as soon as possible. This is one task that should be first on the list every day. Once sent, make sure you follow up the day after the invoice is overdue. A polite phone call to jog the memory or a second email can help things along.
7. Give customers many options for payment. Emphasise your preference for electronic payment such as direct debit so you receive the payment as quickly as possible and don’t have to wait for cheques to clear. It is now common also to charge a surcharge for credit card use to help offset merchant fees.
8. Split payments for longer projects. This way you’re not waiting on payment for the full invoice at the end of the job. It has the advantage of providing some security of payment as well as increasing cash flow.
9. Monitor your stock and replace products that are unlikely to sell. Focus on the better-selling, higher-margin items.
10. When things get tight, triage your payments. Call all your suppliers and negotiate extended periods or deferred payments. Don’t pay the biggest debt first, pay the most important.
11. Link sales commissions to invoices paid rather than revenue billed. A cold call from your accountant to a customer asking why a bill is unpaid is going to be less well-received than the sales rep giving a friendly reminder at the next meeting. It also gives the sales person a reason to speak to the customer again, and perhaps lay the ground for another sale.
12. Stage key milestones for payments. For service providers providing project-based services over an extended time period, stage payments to match cash inflows with likely expenditure and cash outflow on projects. Also consider an upfront deposit.