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Cashflow enables business owners to evaluate the financial position of a company. Whether it’s to measure the health of their own company, evaluate the payment capabilities of customers, or gauge the financial capacity of vendors to meet their commitments; it can be a useful tool.
For most small businesses improving cash flow can be a challenge, even when profits are up, the overall financial picture may not look as healthy. Even profitable companies can face cash flow issues if other financial areas of the business aren’t operating efficiently.
Therefore, we’ve put together some strategic ways to improve cash flow and give yourself some financial breathing space.
Also, download your free 13-week cash flow forecast template below!
Here are our 8 ways to improve cashflow and help put your business on much stronger footing in the long term.
1. Incentivise prompt payment and review standard payment terms
Offer Discounts for Early Payment. Everyone loves an incentive, and if you offer discounts to customers who pay early, you’re creating an enticing reason for them to settle their invoices ahead of time. It can be as simple as2% off the total. Don’t forget to put it on the invoice so it’s easy to spot!
Negotiate shorter payment terms. If your suppliers insist on 30 days payment terms yet your customers terms are 60 days, you’re always going to be on the back foot. Shortening the term will help increase inflow and may help your customers split invoices into more manageable amounts. You could even ask for a partial deposit upfront too.
Review how easy it is for your customers to make payment .Are you able to offer electronic payments options for bill paying? Is it an option to setup a direct debit for customer’s recurring services? Speak to your accountant about the numerous options out there for automatic payments with customers.
Reduce the risk of unpaid invoices by adding late payment fees. Be sure to clearly highlight the late payment penalty in the initial customer contract and again when you first invoice, explaining what the fee is and when it applies.
2. Conduct Customer Credit Checks
If a customer doesn't want to pay you in cash, and would like a credit account setup with your business, be sure to conduct a credit check. Especially before you sign them up. If the client has poor credit, you can fairly assume that they’re unlikely to make payment on time.
As much as it will be tempting to accept the sale, the late payments will hurt your business’s cash flow. If you decide to offer them an account for a sale despite any questionable credit, be sure to set it up with a high interest rate.
3. Lease instead of buying
If you’re focused on paying attention to the bottom line, it may seem counterintuitive to lease over buying as it is usually the more expensive option. Though unless you’ve got plenty of cash stashed in the bank, you’ll probably be better off maintaining a cash stream for daily operations and monthly overheads.
There’re also large up-front costs associated with buying outright which you can avoid by renting or leasing equipment, vehicles or real estate. Small regular payments are much more manageable for a growing business and help to improve overall cash flow.
An added bonus is that lease payments are a business expense, and thereby can be written off on your taxes!
When leasing you’ll also avoid those costly repair and maintenance bills as many commercial leasing agreements include servicing.
4. Pay suppliers less and consider forming a buying cooperative
If you’ve got a good relationship with your suppliers and are in regular communication with them it’s worth attempting negotiating better payment terms for yourself. Much like the mentioned for customers, you could offer to pay early if they’re willing to give you a discount if you do so.
Holdoff on making immediate payment to suppliers if possible and check through your terms to see if there’s anyway you can keep the cash with you until due. As you speed up accounts receivable, you’ll want to attempt the opposite strategy for accounts payable. You can then prevent a cash shortage by slowing your cash outflow.
Don’t be afraid to negotiate, either. Contact suppliers and see whether they’d give you longer payment terms in exchange for your business.
Forma buying cooperative. There’s power in numbers, if you can find other like-minded companies willing to pool their cash in order to haggle lower prices with suppliers, you’ll be able to access the big discounts usually reserved for large firms who buy in bulk.
5. Send invoices out immediately
It might seem like a simple one, but as you’re probably well aware, business owners are time poor. Therefore, once the sale is secured and delivered the invoicing part can drop in priority but you mustn’t let it. If you invoice as soon as a job is done, you'll see receivables come in more quickly this way. The credit control process is one of the most important for a business and you’ll want to make sure you understand the basics of how to put together a good invoice. Clearly state your terms in an easy to read format, as mentioned make payment easy and as soon as the invoice goes a day overdue send a reminder for payment.
6. Increase your pricing
Increasing prices is a concept that many business owners fear. You may be concerned that it will reduce sales, or upset existing customers, but it’s perfectly acceptable to experiment with pricing. Some companies such as AutoTrader actively encourage dealerships selling through their platform to increase car sale prices if they’re below the national average as it results in higher sales. There is a standard price, or national average, most people are willing to pay for a product or service and you won’t guarantee more sales simply by undercutting it. It’s proven that consumer quality expectation is tied into price, so have confidence in your product or service and bump up the price to the true value of your time, costs and expertise. We think you will be pleasantly surprised!
7. Measure, report, improve
It’s important to make time to measure all aspects of your business operation. This way swings in positive then negative cash flows won’t catch you off guard as you’ll have identified a pattern in advance.
Study your cash flow patterns. If you perform a cash flow analysis, where you study your business history to identify trends, you can spot cashflow swings ahead of time and start preparing earlier. Download our free cash flow forecast below!
Maintain a cash flow forecast. A cash flow forecast is a document showing your business’s income and outgoings for a set period of time, broken down by weeks or month, or even quarter. It allows you to see at a glance when you will have a surplus or a deficit of cash in your account, helping you to plan when to pay expenses.
To create a cash flow forecast, you’ll need to calculate estimated cash incoming and outgoing each week. As with a sales forecast, use your historical data to identify patterns and guide your estimates, considering any trends or events that might increase or decrease these figures.
Finally, make improvements that will prevent any detrimental impact to your cash flow. Take stock of your inventory. Make a list of the goods you buy that aren't shifting at the same pace as your other products. They could hurt your cash flow as they tie up a lot of cash.
Instead of buying more of what doesn’t sell, get rid of it, even if you need to sell it at a discount. It's hard to walk away from products you fall in love with, hoping that someday you'll magically see heightened demand, but that almost never happens. Be objective, not emotional.
8. Take back control & yield better results
Use High-Interest Savings Accounts. This will provide you with liquidity while growing your cash position. The best high-yield savings accounts offer interest rates as much as 25 times higher than the national average, meaning you'll earn more on the money you've put away.
Consider invoice factoring. Invoice factoring allows businesses to free up ready cash by “selling” an outstanding invoice to a third-party company. Typically, the factoring company will buy an invoice for 70-85% of its total value, and then take over the credit control process and chase the customer for payment. Once the factor has received the payment from the client, they will pay the vendor the final outstanding invoice value, minus their fee which is usually around 1.15% to 4.5%.
For businesses that have high-value invoices, the most potentially damaging to cashflow if they go unpaid, invoice financing can be a low risk way to release working capital. Invoice financing is a way for businesses to borrow money against the amounts due from customers. Speak to your accountant to find out more about this option.
In Summary
Even profitable companies can experience cash flow problems when their debts are due before they've collected enough money from sales to cover their bills.
Healthy cash flow is the result of operations that run efficiently and smoothly. While implementing some or all of the above points should help you increase your business's cash flow, you'll also want to make sure you're making the right decisions regarding your marketing, customer service, product or service development, and new customer acquisition.
That's why it's critical to review and update your business plan on a regular basis to ensure you anticipate trends and challenges before they impact your profitability.
To help you measure and improve, we have provided a 13-week cash flow forecast with auto-sums included to help you plan out different scenarios and look at the best solution for your business. Download your free template below!
If you’d like more information or need to talk to us further about how we can help you identify opportunities and limit any impacts caused by cash flow issues, get in touch with our team on 01322 555 442 or email happytohelp@bluerocketaccounting.com
