Being a small business owner can be really rewarding after all most of us go into business to pursue a passion. But owning a business can also be incredibly stressful, frustrating and tiring. Working with a lot of other local small businesses and being one ourselves, we understand the daily, monthly and annual struggles we all go through as business owners.
Cash flow is a common issue most businesses go through at some stage. Adding this to the other stresses related to running a business and you end up with sleepless nights and feeling sick to the stomach wondering how you’re going to pay your next bill or put food on the table for your family next week. We’ve helped most of our clients work through cash flow challenges, and the good news is there’s a light at the end of the tunnel! We have put together a handful of strategies we have used in other businesses to help increase cash flow and thought we would share them so you can improve yours too.
Send Invoices Immediately
It might seem like a bit of an obvious one, but the sooner you send out invoices, the quicker you will be paid. It’s surprising how many businesses sit on invoices until the end of the month or quarter. Once the job is complete, send that invoice ASAP! You will see receivables coming in quicker this way.
Implement Payment Terms
Ensuring you have strict payment terms that your customers are well aware of is crucial and it’s even more crucial that you stick to them. As soon as an invoice is overdue, follow that debtor up, don’t wait a week or even a few days. The sooner you chase it up, the sooner you’re paid. You can save yourself all the hassle of doing this yourself by setting up programs that do all the work for you, sending debtor reminders and automated invoices. We wrote about our favourite Xero Add-Ons here and talked about debtor management programs.
Get Your Inventory Moving
Any business selling products obviously relies on the movement of those products to make money. Have you got products that aren’t moving at the same pace as other products? Firstly, stop buying products that don’t move quickly. Secondly, get rid of the rest, even if it means selling at a discounted rate. Too much money is tied up in stock to let it sit for too long. That cash could be better spent on buying products that do sell well or on business growth activities.
We know it can be hard to let go of some products that you thought would be a real hit. Unfortunately, it’s just not worth holding on to it for years in the hope that demand might pick up, because the chances are, it won’t. Make rational decisions, not emotional decisions.
Payment Plans
This is really important for those really big jobs where you need to limit the risk. Creating progress payments that are tied to completion of stages or time periods will take away a lot of your risk, rather than waiting until the full completion. Not only will it give you regular income throughout the job but it will also reduce your debtor risk.
As long as it’s outlined in the contract, you can stop working on a job until the client has paid their debt. Discuss the issue with the client and inform them that work will not recommence until they have settled their account. Being upfront with this at the beginning of the contract will ensure you have a happy relationship with the client and they are well aware of your obligations as well as their own.
Subscriptions
A bit like the above, but more for businesses that have products or services that are regularly consumed. Set up a subscription plan/regular direct debit. You can forget about chasing customers for money on a regular basis or even having to ask for it at all. Using this strategy will ensure you're paid before delivery of the product, this works really well for businesses like gyms, newspapers, magazines, cleaning services, and gardening.
Negotiate With Suppliers
Building a good relationship with your suppliers/creditors is really helpful as it will put you in a position for negotiation. Discuss the possibilities of extending your creditor days and the option of interest-free trade accounts. Consider talking to your creditors about getting a discounted price if your invoice is paid before it's due date.
The longer you can keep your money in your own pocket, the better. You might even decide to pay creditors with a business credit card with interest-free days. Just be sure you will be in a position to pay the credit card off completely before the due date otherwise you will end up putting yourself further behind and in even more debt.
Chat with other local businesses too, you might be able to form a buying cooperative where you have more negotiation power. The more of you who are willing to give your business to a company, the more incentive for them to look after you and discuss a possible discount for you and the other businesses.
Create Incentives
Give your customers an excuse to pay early or on time. Just like we mentioned above with your suppliers offering discount prices on early payment, you can do the same for your customers. People are far more likely to pay you on time if you give them a good reason to, and who doesn't want to save money? On the other side, implement consequences for late payment, where the customer might incur a late payment fee, that might be enough to kick them into gear!
Be Wary of Scope Creep
There's nothing worse doing work for someone that you're not getting paid for. Unfortunately, for service-based businesses, this is the case all too often. Always make sure your obligations to the client are outlined clearly in a contract that both you and the client agree one. Within that contract, you also want to note charges for additional work which is outside the contract. We would recommend always getting paid for extra work BEFORE the work is commenced. Clients can easily get confused with what is and what isn't included in their contract, make it black and white for them, and let them know as soon as they make a request outside the agreed contract.
Healthy cash flow is an indicator of a business running efficiently and smoothly. Following the steps above, you should be able to tighten things up to get paid on time and save you from constantly chasing your tail. If you feel you need to implement some new systems and accounting programs in your business to better manage your cash flow, give us a call today and we can discuss a plan moving forward to put your business in a better position and give you a good night's sleep!