Cash flow management is essential for a business to flourish. As global fashion magnate David Tang succinctly put it: “The three most dreaded words in the English language are Negative Cash Flow”.
Throughout 2017, only 54 percent of Australian small and medium-sized businesses enjoyed the benefits of positive cash flow. Many business owners have trouble growing their business because they don’t put enough focus on cash flow management and many don’t even know where to start.
To get your business to grow, you need to convert sales to cash quickly and build a float by increasing the time between incomings and outgoings. Here are 10 tips to help you improve your cash flow management.
- Collect what you are owed consistently and often
If you collect payments in smaller chunks and regularly, it will help to boost your cash flow and help you to avoid waiting for late payments.
- Send out reminders
There are heaps of apps and simple automated messaging systems that will allow you to encourage prompt payment. Always remember that this money is owed to you, it’s yours! Each reminder that you send out will increase the likelihood of receiving a payment of some sort. Address the recipient personally and politely. And don’t be afraid to send out more than one.
- Reward early payments
A great way to encourage customers to pay their bills is to offer a reward, or future discounts if they settle early. This is a win-win for both parties. You will be paid in a timely manner and your customer will feel that they have got a great deal. Happy days!
- Penalise late payments
Sometimes, no matter what you do, customers will pay late. If you issue penalties for late payments, it is another incentive for clients to pay up on time. As long as you stipulate that you will charge a late payment fee when you make the sales agreement, this approach will not only encourage people to pay up, but it will also give you a little extra cash for your troubles.
- Pay your bills strategically
If your business is doing well and you have some extra cash in hand, then it is well worth chasing up all your bills and any unpaid invoices. If you pay them all in advance, then you will have created a bit more of a cushion for your business. On the flipside, if you are a bit strapped, then it may be a good move to delay certain payments. Be astute, some have more flexible deadlines than others.
- Avoid penalties
Just as you might do, suppliers may impose late fees on you if you do not settle in a timely manner. Try and always settle up on time. Late payment fees are a total waste of money, plus it could also make your suppliers wary of you.
- Review fixed and variable costs
Keep track of your business’ fixed costs. By and large, things such as wages and rent will not change on a monthly basis, so understanding them will give you a better overall understanding of where your money is going every month. Also, keep a closer eye on variable costs. For example, If your phone bill is skyrocketing, then you might want to review the plan you are on. The money that you save can be put back into the business and that is another good example of cash flow management.
- Inventory management
Whatever your business activity, managing inventory is an essential part of keeping costs down. You should always be wary of tying up too much cash in your inventory as you might not have the cash you might need when paying bills or dealing with an unexpected expense. Order only what you need and keep well up to speed.
In the long-term
- Forecast cash flow
Analysis of your cash flow management will help you identify areas where you can improve things and give you a forecast of the cash you will have at a given date in the future. This helps with planning and budgeting. You should always keep accurate and up to date records so a bookkeeper or accountant can perform this analysis. Alternatively, you can (try before you) buy apps, such as Float, which will integrate seamlessly with existing accounting software to provide you with a clear and accurate real-time forecast. Read our review here.
- Drive down costs
Costs are obviously the number one factor that eat into cash flow. You can take several steps to try and drive them down. You can re-negotiate terms with suppliers to drive down outgoings for inventory, supplies, equipment, and services. You can also look at your energy costs, for example, and appoint a broker to find you a better deal. You can also look at long-term options such as installing rooftop solar. You should also re-evaluate your payroll and see whether you are using a system that makes you pay more tax. Sitting down with a professional accountant and bookkeeper is a great way to help you identify ways to drive your costs down and free up more money to put back into your business.