All small business owners should aim to have more money coming in than going out. From shortening your cash cycles to managing debt, there are several ways to improve cash flow.
And once you’ve got it firmly in hand, you’ll experience greater freedom and opportunities to grow your business.
A healthy cash flow means you’ll have working capital to reinvest in your business and sustain its competitive edge.
Shorten your cash cycle
Your cash cycle is the time it takes from you doing the work to getting paid. The shorter the time, the faster the cash comes into your business.
The best-case scenario is you get paid immediately.
This works fine for businesses that sell products or services that require you to pay immediately to get it.
But for any business-to-business product or service, you usually invoice and then wait for payment.
To help shorten your cash cycle, you should:
- Try to get paid immediately by generating an invoice immediately after completing a job so your customers can pay on the spot. Then you aren’t waiting until the end of the month for the cash to show up in your account.
- Encourage early payment. If you still need to invoice, do it early. Don’t wait for the end of the month. And provide incentives to encourage your customers to pay early. You could offer a small discount for paying within 10 days of the invoice date. A 2% discount for payment within 10 days could be an effective option that won’t leave you out of pocket.
- Ask for deposits or pre-payments if you can, especially for larger pieces of work.
Improve your margin
The more margin, the less you have to work to get the same result. Two of the best ways to generate a better margin are:
- Reassess and lower your costs: Regularly compare your budget with actual expenses. And frequently check the pricing offered by alternative suppliers. Plan to renegotiate prices with major suppliers yearly. And remember that smaller costs (like phone and internet) can slowly creep up over time. There might be better deals out there.
- Reassess and increase pricing where you can: It can be a bit scary to consider raising prices—but only if you assume your target market is price sensitive and your only goal is to be a price leader. Market research will help you work out the actual price tolerance of your target market and what their alternatives are.
Costs and pricing strategies are the fundamentals. Once you’ve taken action for each, you can look at other ways to improve your cash flow.
See if you can delay payments
If you’re having trouble paying your bills, don’t avoid your creditors.
Be upfront with them. And work with them to figure out ways to pay your debts more easily. This might include:
- A repayment schedule over a longer period
- Pay monthly retainers or partial payments as you go
In most cases, your lenders will do what they can to help you—just as you would for your customers.
Reduce the chance of bad debts
Offering credit is often convenient and can help retain your best clients. But make sure you minimize all the potential hassles and risks that can go with it.
Keep these considerations in mind:
- Always have customers sign your credit policy. It doesn’t matter how trustworthy you think your customers are, they still need to sign on the dotted line so that your terms and conditions are clear.
- Have minimum credit terms (under a certain dollar amount, customers must pay cash) and maximum credit terms (over a certain dollar amount, they must pay a portion in advance).
- Know how to reduce the risk of fraud, and make sure your staff knows too.
- Put sound systems in place. Set up a debt management calendar, and keep on top of debtors with repeat meetings and reminders.
- Use accounting software to red flag late payers and follow up immediately. Pay close attention to large outstanding invoices as they draw near, and keep your ear to the ground about the financial health of your customers (especially if they just placed a large order that puts your business at risk if they fail to pay).
- Know your legal rights in collecting debts. Get legal advice and consider collection agencies if the worst happens and your customer refuses to pay.
You’ve heard the saying, “Cash is king.” And there’s a good reason for that. Without it, a business can’t grow, secure financing or attract investors.
When you improve cash flow, your business is protected if you face problems repaying a loan or your sales aren’t what you’d hoped for.
While profits help your business realize its financial goals, having a strong cash flow means you’ve got what you need to keep operating and reinvesting in business growth.