To function smoothly and keep growing, small businesses need enough cash in hand. Cash is an extremely convenient thing to have. It allows you to carry out a number of things — you are able to pay your suppliers and staff on time; you avoid late payment charges on the bills; you are able to take on new projects; and you gain negotiating power with prospective as well as existing customers.
All in all, your operations run a lot smoother and your employees trust you more when there is enough cash in the system.
But despite the critical importance of a smooth cash flow, small businesses often struggle to achieve it.
The reasons for this are many and varied. The suggestions provided here may be able to help you understand, address, and better solve your own unique cash flow-related problems.
This is the first step in gaining control of your cash flow. Forecasting helps you get on top of circumstances and plan so that you have enough cash with you for each and every month.
Take the help of accounting software and enter the amount of cash you will have with you at the start of the next month minus the expenses you are going to incur plus the cash you will receive that month. Here’s a list of some of the best cash flow apps in the market to make this easy and as accurate as possible for you.
For those who want to keep things even more simple (and old-fashioned), here’s a nice video for you to help you forecast your cash flow with an Excel spreadsheet or a calculator:
Stop Giving Credit to New Customers
Credit and risk go hand in hand. It’s therefore important for you to understand the full extent of risk involved in extending credit to new businesses. For all the new customers you take on, insist on payment before delivery. Stop opening any more credit accounts for your customers. You will be surprised at the difference this makes to your cash flow each month.
For one, you don’t know how trustworthy they are and whether they will pay on time, or if they will pay you at all! (This is not to suggest others are out to cheat you; they may not be able to pay on time due to an unreliable financial situation at their end.) And for another, you really are in no position to give out credit when your own cash situation leaves a lot to be desired.
It’s nice to trust people, but not at the expense of smooth business. If you have to chase them for payment, it would be an even bigger waste of your resources.
Negotiate Terms with Existing Customers
Invoicing customers on a 30, 60 or 90 day basis is responsible for cash flow woes of many small businesses. Therefore, insisting on prompt payment as often as you can will really help.
It is understandable that you don’t want to spoil your relationship with your customers, but if an arrangement is working to their benefit and not yours – if, in fact, it is causing you problems, then you must do whatever you can to change the terms to help your cash situation.
It is best to set beneficial terms in the first place. But if that isn’t the case, renegotiate the terms with your clients.
This need not be awkward. Here are a few ways to help you out with this:
- Do a good job of fulfilling their orders. If you are good at what you do, chances are your customers will be more amenable to listen to you.
- Write to them stating your new terms and requesting them to consider them. Follow up with a phone call. They will likely not agree straightaway. See if you can give them an incentive to bring the payment date forward.
- Ask if they can pay a certain amount of their invoices upfront. Something is better than nothing!
- Negotiate for 80% of invoices to be paid on your terms, with an exception made for the remaining 20%.
- If immediate payment of all the invoices will make a considerable difference to your cash flow, simply insist on it. If your customers have been happy with your services and rates, chances are they will agree to your terms. For those who don’t, keep negotiating and try to win them over with incentives.
- Offer to remove a pain point in return for faster payment.
If renegotiating terms is not possible at all, and if you belong to an industry where most business-to-business orders are invoiced, you will have to find other ways to improve your cash flow situation.
Provide Excellent Customer Service to Attract and Retain Customers
To keep cash coming in, you will need to keep finding new customers or, at any rate, avoid losing existing customers.
It helps to focus on the quality of your service if you want to build long-term stability and credibility for your business, and that includes ensuring smooth cash flow each and every quarter.
Pay attention to each and every aspect of order fulfillment and refine all the processes involved. Pay particular attention to customer service. Make it as smooth as possible for your customers. If they are happy with your work, they will give you bigger orders or even recommend new clients, thus increasing the amount of business you do and bringing in more money. More money will leave you with greater cash and greater control over your cash flow. It will also give you leverage to negotiate better terms with your customers if needs be.
Keep a Lid on Your Expenses
Businesses incur a number of expenses, which is why you need to be very smart and meticulous about tracking them. Don’t let anything slip under your radar.
- Don’t hire new staff unless you are certain you will have enough cash on you to pay them on time.
- Don’t buy new equipment unless you absolutely need it and have enough money to pay for it without this transaction negatively impacting the cash flow for that month or the next month.
- Lease equipment instead of buying it.
- Don’t stock up on inventory unless you have orders in hand to justify it.
- Negotiate terms with your suppliers.
- Anything that isn’t downright necessary for you to buy or pay for, put it off to another day.
- If you really are in a pinch, sell your invoices to a factoring company to receive immediate cash to pay for your operational expenses.
Collectively, the above will make a huge positive difference to your monthly cash flow if you practice it regularly.
Every business is different, and so are its challenges and cash flow-related problems. Depending on the industry you operate in, all of the above might or might not be applicable to you. Our aim, however, is to get you thinking along the lines of what you can do develop some modicum of control on your cash flow. And there really is a lot.
We have given you some suggestions here, do mull over them and see if you can benefit from them. If you have any ideas for businesses about how to improve their cash flow situation, feel free to share them with us. We would love to hear from you!
Images: “Financial operations (cashflow, budgeting, bookkeeping, accountancy) in blue monochrome/ Shutterstock.com“
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