Keeping more cash flowing into your business
< back to all business news articles
The aim of any business owner should be to have more cash coming in than going out. One of the most effective ways of doing this is to plug any gaps in your cash flow, then seek ways to improve the flow.
Remember a healthy cash flow means you’ll have more working capital to reinvest in your business and sustain your competitive edge.
First,shorten your cash cycles
The cash cycle is the speed from invoicing or doing the work, to being paid. It’s important to understand what kind of cycle your business is on. For instance, retailers or services like hairdressers, have cash coming in immediately. If you’re selling business to business you may need to wait until the following month. Or are you more like an orchardist on a seasonal cycle that sees fluctuating cash during winter and summer?
Try to avoid lengthy periods of time when your business goes without cash, which can lead to all sorts of problems from paying your creditors to keeping operations going. Identify ways to speed payments up to shorten your cash cycle, such as:
- Ultimately if you don’t offer credit at all, and everyone pays immediately, then the cash cycle is only seconds long.
- If you do need to invoice, try and be paid on the job – offering your customers mobile payment options is a great way to get paid immediately. And it means you’re not waiting till the end of the month for the cash to show up in your account. Because let’s face it – money in the bank’s more use to you than a cheque in the mail.
- Encourage early payment – if you still need to invoice, do it on the same day as the work. Don’t wait for the end of the month.
- Provide incentives to your customers to encourage them to pay early. For example, some businesses offer a small discount for paying within 10 days of an invoice date. If you don’t want to offer a monetary discount, then offer free product or services instead.
Improving cash flow
Once you’ve got to grips with your business cycle, and with your cash flow, it’s time to improve how much cash is coming in and sticking.
Consider some of these tried-and-true methods:
- Reduce your costs – the old analogy of fixing the hole in the leaky bucket is still true. Review your business and look at ways you can lower costs or remove any unnecessary expenditure. Such as exploring different energy provider options, getting rid of outdated and un-used equipment, using technology to streamline processes, and outsourcing time-consuming tasks such as payroll. Remember that costs slowly creep up over time, so you need to regularly compare your budget with actual cost figures and see if you can reduce them.
- Increase your prices – it might be time to review your prices as assuming you can still maintain the same sales volume, a price increase widens your margins and generates extra cash. You should always be seeking to increase your prices over time, so that you can improve your profit margins and keep up with inflation.
- Talk to your creditors if you are late – the absolute worst thing you can do if you’re facing difficulties paying your bills is to bury your head in the sand and not communicate. Instead, be upfront with your creditors and work with them so that you can pay off your debts efficiently, by offering to set up a repayment plan.
- Manage debts – if your customers owe you money, the faster you’re able to obtain pay back using effective collection tactics, the better. Ideally, you want to reduce the chance of bad debts and pressure on your business’s cash flow. Don’t skip credit checks – it’s especially important to do your homework and check up on your customers, so you can be sure you’re allowing only reliable customers to have credit.
- Become more streamlined and efficient – there’s lots of technology out there designed to streamline your business processes and make them more efficient, so you might as well make use of them. In fact, you’d be remiss not to. For instance, you can cut down on travel costs by using Skype instead.
It all boils down to common sense. You’re looking to find ways to have more cash coming in to your business than going out, which is a combination of plugging any leaks and tipping more cash into the pot. Don’t forget to talk to your advisers such as your accountant and business colleagues or to us about ways to bring your cash flow problems into line.