In the current economic environment with many companies in financial turmoil, having to cope with budget cuts and austerity measures, a good cash flow is the lifeline of any business. If there is a problem in cash flow and the company is having trouble collecting cash, and using it wisely, there is every likelihood that the company will struggle to survive in the current environment. There is why the old adage ‘cash is king’ is particularly true in the business world of today.
As a business owner, you need to be aware of ways to improve cash flow. Budgeting and collecting are not glamorous but they are both key to achieving and maintaining a successful business.
1. Know the cash balance
It is extremely critical that you know exactly what your cash balance is at all times. Always monitor your cash flow and that way problems can be recognized earlier and corrected. This is a fundamental point.
2. Don't manage from the bank balance
Remember that your bank balance and the cash balance are two different forms of cash; they are very rarely the same figure. Don't make the mistake of confusing them as attempting to manage your cash flow using your bank balance will result in errors and failure.
If you don't have one, make one now. The budget is part of a business plan. You want to know exactly how much to spend on each large item you purchase and when you will have the cash to do it.
4. Invoice your clients regularly
This is so obvious but still many businesses are so busy selling to new clients that they forget to invoice the clients they have already worked with. Put the task of invoicing your clients on your calendar and then stick to that schedule or invoice them as and when the job is finished.
5. Credit Control
As important as it is to invoice the customer, it is equally important to collect the money as well. The longer your receivables are outstanding, the less likely you are to collect. Collecting promptly from your clients doesn’t qualify you as mean, just rigorous and diligent. A good rule of thumb is that you should always have a due date on the invoice and then send out a follow-up statement within 10 to 30 days from the due date.
6. Accounts Payable
Just as you have customers, you are bound to be someone’s customer as well. Negotiate terms with your supplier’s to help delay the outflow of cash payments. 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. Then hopefully you will receive payment from your customers prior to needing to pay for the products you purchased.
7. Cash Payment
Consider operating like a cash and carry type business instead of worrying about receivables. The best business plan is one where customers pay at the time of purchase so you don't have to worry about invoicing or collection procedures. Once you set up the payment system like this, your customers know what to expect, and administration costs of invoicing, following up and collecting are significantly lessened.
Consider giving discounts for early payment by customers. When you send the invoice, give them the option to pay early and get a discount anywhere between two percent to five percent. The other option will be, when the customer pays within a certain number of days, they get two percent to five percent off their next invoice. Conversely, apply a penalty for late payment, or an ‘interest’ charge to encourage early payment.
9. Upfront payment
If you are working on expensive project or long term project, it might to a good idea to have some of the payment in advance. It not only helps you with cash flow but also helps to fund the upfront costs connected with the project. But you have to be careful with this approach as while some customers might be willing to go along and pay in advance, others might think that you will not be able to finish the project without their help. They might try to re-negotiate the price or worse leave you, and take their business somewhere else.
10. Savings for a rainy day
Almost all businesses have ups and down in their business flow and hence the cash and managing cash effectively can be a challenge. Although it can be hard, putting away a little bit during the good times to help alleviate issues during the rough season is vital. As I do personally, take whatever you have left at the end of the month in the current account and transfer it into the saving accounts. You can always access it later if needed.