Cash flow is a term thrown around in business all the time. If your cash flow (1) is positive, then the chances are your business is either turning a profit or bringing in large sums of money from other sources. If it’s negative, then you’re probably in trouble.
In either scenario, it’s important to understand how your cash flow will affect the day to day running of your business. Negative cash flow can often result in you losing more money than you earn. Fortunately, there are ways you can offset the damage negative cash flow causes, keeping your company from being washed away downstream.
Keep Up To Date With Your Clients’ Payment Habits
In an ideal world, all of your clients would pay by the book, settling their bills on the same day each month. Unfortunately, for many small businesses tardy clients are an all too common feature.(2) Overdue invoices can have a strong effect on your cash flow since you won’t be earning back your money as quickly as you’re spending it.
In order to reduce the deficit, it’s wise to keep a careful eye on your clients’ payment habits. Perhaps they are usually no more than a week late with their money or maybe they are consistently much harder to pin down. In either case, you begin to gain a better idea of when they are likely to come through for you. You can then begin to plan your expenditure around clients who pay promptly. By doing this, you ensure you are covered for any purchases you make and improve your cash flow at the same time. If you have a client who is particularly lax with their payment schedule, then you should consider ending your connection with them permanently.
Stay On The Ball With Your Invoicing Routine
Whilst late payments may be out of your hands, late invoicing is certainly something you can avoid. If you are slow to send your invoices out, then you can expect your clients to be equally slow in paying them. Fastidious bookkeeping may feel like a chore, but it is also a vital component of maintaining a healthy cash flow.
If you make the effort to invoice your clients on the same day each month, then they will get into the habit of preparing themselves for this payment. The longer you leave it, the more excuses you are likely to receive. By clearly stipulating when you expect payment, you can improve the chances of it entering your account promptly. A small business bookkeeping service can help you keep on top of invoicing procedures, so you don’t have to worry about handling them all yourself.
Increase The Accessibility Of Payment Options
In the digital age, there’s no excuse for delayed payments. Invoices can be sent via email and paid in a matter of seconds. Of course, you need to make these facilities available to your customers in order to increase the accessibility of payments.
If you use a particular online bookkeeping service (3) to construct invoices, then make it clear in your payment guidelines that clients should expect to receive an email from this site. The fewer reasons clients have for delaying payment, the higher the chance of them handing over the money on time. With more payments secured on your schedule, you will begin to see your cash flow steadily improve.
Restructure Your Own Payment Schedule
Whilst tardy clients are frustrating, delaying your own payments can help you keep hold of your cash for longer. If you regularly purchase stock from the same wholesaler or warehouse, then you might be able to negotiate a later payment option with them. Although you should never abuse the relationship between you and your supplier, (4) reaching an agreement where you can pay for stock after you’ve sold it could prove beneficial to maintaining your cash flow.
Things like utility bills payments are likely to leave your account at the same time each month, but friendly suppliers will usually be more flexible. Armed with this information, you can assess when the most money will be leaving your business and suspend stock payments until later on in the month.
Get Creative With Presales And Product Bundles
Presales are an often underused method of receiving money before a product is launched. If you have a high demand item in the pipeline, then you may be able to drum up enough interest in it beforehand to pay for its production. Having the money to hand during this time will make it easier to cover any unforeseen production costs. Whilst it may take a strong advertising campaign on your part, the effect of early payments will be quickly seen in the marked improvement to your cash flow.
An alternative solution is to offer less desirable products as part of a package deal. Bundles make slow selling items seem more attractive, (5) as they appear to be a steal when purchased alongside higher priority items. Use your creativity to place certain products together and sell off stock that would otherwise be languishing on your shelves.
About the author: Chris Weston is the director of Aston Black, a small business accountancy firm in Milton Keynes, UK. Chris has over 25 years experience in accounting and taxation, working with his small team of staff to provide quality advice for companies and freelancers up and down the country.