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Any small business owner will understand the importance of cash flow. The problem arises when debts are paid late or not at all and this restricts the amount of actual cash available.
A business can be profitable but find that all the finances are tied up in their hard assets or outstanding debts; as in unpaid invoices. A business owner cannot always control how quickly sales invoices are paid but there are ways to improve cash flow into the business.
What is cash flow?
When money flows into and out of a business it is described as free cash flow. A business owner will need this to be able to purchase stock and pay its employees as well as other normal business operations. Taxes, bills, and other debts need to be paid and this all requires access to cash.
Liquid assets refer to either actual cash or something extremely easy to convert into actual funds. Therefore banknotes, bonds, stock options, and mutual funds are all classed as liquid assets. Other assets such as property, land or manufacturing equipment, machinery, and fleet vehicles would be called hard assets and do not help with cash flow although they can affect the overall value of a business.
Why is cash flow important?
A business can be profitable even if it doesn’t have any or little cash flow. There could be a lot of money tied up in a company’s hard assets and accounts receivable which means the company is in profit. However, having no cash flow leads to many problems for a business’s daily operations.
Financial planning for small businesses is very important and without a flow of cash running through the business, it is impossible to plan for the future. This can lead to rash or poor business decisions. Poor cash flow may lead to unwise refinancing or not being able to pay suppliers.
- Here are some reasons why a healthy cash flow is important to your business:
- Paying taxes
- Maintaining healthy relationships with suppliers
- Paying utility bills and keeping operations running
- Paying employees
- Financing planned expansions
- Maintenance costs
- Financing debts
Without cash flow, you will very soon have a disgruntled work-force, unhappy suppliers, and the bank knocking on your door. The question is how can you keep a healthy supply of cash flowing through the business?
How can you increase your business’s cash flow?
Luckily there are various ways you can improve your business’s cash flow problem. Assuming that your business is successful, manufacturers good products, and is running smoothly and the only issue you have is cash flow. Below here is a list of things to consider and use in your business to help finances run smoother.
Send your client’s invoices quickly
It goes without saying really, that the sooner your client is invoiced the faster they should send you the payments due. There will always be some late payers, some who are having cash flow problems of their own or are just slow with paying.
Ensure all the details on the invoice are accurate and the information is clear. Any error on the invoice can lead to delays. Also, make sure the payment due date is very clearly marked as receiving cash is what your invoice is for.
Offer discounts for speedy payments and penalties for late payers
Offering an incentive for swift payment can hurry clients into paying early. A typical invoice will allow for 30 days for payment but you could offer a discount to speed things up. A discount for payment within 7 days could see a marked improvement in your cash flow.
Alternatively, you can stipulate in your contracts the opposite of a discount. If a payment is over 30 days then you can introduce a penalty. This may be a set amount or a %. You could charge interest on the overall due amount in the form of a percentage.
Offer different types of payment plans
If you have regular, trusted customers or a client placing large orders then you could allow a payment plan – with or without interest – to keep regular cash flowing in. This would perhaps depend on the type of business you have and whether your business model was suited to staggering payments.
Alternatively, if a customer is having problems paying then instead of going down the route of debt collection you could offer a payment plan to help them clear their outstanding debt. Software companies like Payt provide debt management software that can automate payment plans such as this, helping you and your client with cash flow and debt clearance.
Lastly, you could even offer a layaway scheme. This is where a customer will pay you regular payments for a product up to the point where they have given you the full sales price. This is an easier way for a customer to pay while ensuring you never have to worry about invoices or late payments. There would normally be a penalty if the contract was not concluded where you would refund only a percentage of the amount paid.
Take deposits on orders
Taking a percentage payment on a large order means that even if your customer pays late you will still have received some cash into the business. Although you will still need to invoice the remaining total, your company has some cash before the order even goes out which can help with manufacturing and operation costs.
Allow for scope-creep in your quotations
If you are not sure what scope-creep is then you are not alone. This is where one individual (or a firm) plans an operation with another and a price is set. However, as the project is being fulfilled there are changes made, additions to the plan, and the project increases. The problem lies in the original quotation. If a price was set in stone but the project magnifies then the supplier will have less profit.
If your business you are in can suffer from scope-creep then this needs to be included in your contracts and there should be interim payments made to cover extra expenses and manpower. This means not only do you stay profitable but cash is continually flowing into the business.
Invoice factoring
This is an area you could consider to raise some much-needed cash. If you have a considerable amount of accounts receivable and yet need funds to pay for debts or other expenses then you can use factoring to bring in cash immediately.
Factoring is where a source of funds provides your business with a percentage of the value of outstanding invoices. You can only get the amount of the invoices outstanding and they will be subject to a fee or commission. The amount you pay will depend on a few factors including how much risk is perceived to be involved with the customer.
You can read more about factoring online here but the benefits are that the business receives an almost immediate cash injection allowing normal operations to continue. The downside is that it can be an expensive way to raise finances in that you will be giving away a percentage of your sale.
Use a collections agency
The first port of call should always be friendly communication between yourself and your debtor. Sometimes it may be necessary to use a credit collection agency when all else has failed. This will normally lead to the end of your business relationship but will help you to receive the funds owing and possibly with interest too. When choosing a collections agency look to see if they are ACA International compliant and certified. Also, check they have appropriate insurance. Hopefully by using the methods above you will never have to employ this option.
Summary
Asking customers to pay may help speed things up but there is never a guarantee. A customer may be suffering from a cash flow problem themselves but using some of the methods above can help with swifter payments. Other ways to increase cash flow are to use accounts that pay interest, change your payroll methods, sell old equipment and use debt management software to aid with financial operations.
