Cash flow is the total amount of money that enters and leaves a business. It is an essential measure of your business ’ finances. A consistent, positive cash flow can help pay bills, invest in new prospects, and grow your business. Knowing how to improve your cash flow can be a little difficult as there are more than one affecting factors.
What happens if you don’t keep on top of your cash flow?
. Employing additional people or expanding your business may appear to be a good idea, but you must have the cash flow to back it up. Spending money you don’t have is never a good idea
. Too much stock can cause materials to become obsolete and difficult to sell. Employing additional people or expanding your business may appear to be a good idea, but you must have the cash flow to back it up. Spending money you don’t have is never a good idea.
. Long payment terms can leave you with extended durations of no money coming in. Unknown issues, such as a fire in the office or the need to replace a laptop, might become troublesome. There is also the risk of bad debt, which occurs when clients do not pay at all.
Spread your payments and extend payables as much as possible. Don’t pay all of your business invoices at once. If you are unable to pay, this could deplete your funds and even harm your relationships with suppliers. Instead, go through your expenses, organise them by priority, and stagger payment dates so that the most significant items, such as rent and payroll, are paid first. Less significant and more flexible payments can be paid later. However, to prevent late fees, make sure you pay on time. Check to see whether you can get a discount for paying your bills early, and then prioritise the ones that do.
How do cash flow problems occur
There are numerous reasons for cash flow problems in small and medium-sized businesses, which can be generally grouped into three categories:
- Sales are down
- Inadequate cash flow management
- Poor credit control and collection procedures
If your business expands too quickly, your overhead expenses such as outsourcing, recruiting staff, upgrading technology, or purchasing stock in advance will increase. This could lead your expenses to outweigh your revenue, disrupting your cash flow. To address this issue, you can:
- Delay hiring until you need to
- Hire one person at a time, especially in the early stages
- Consider a business line of credit to bridge cash flow gaps
How To Improve Cash Flow In Your Small Business
1. Use software to track your inflows and outflows
As your company expands, so will your invoicing requirements. You may reach a point when your current method of generating invoices no longer fits the needs of your business.
While using invoicing software is not essential if you own a business, any invoices you send must meet certain legal standards. These criteria will be addressed by invoicing software, which will also help your business in accurately accounting for all transactions and VAT.
Invoicing software allows you to produce invoices faster and collect payments faster. In summary, your workload will be decreased, and you will be able to keep track of current tasks.
2. Send invoices out immediately
The sooner you send your invoices, the sooner you’ll be paid. If this is not the case, you can use your invoicing software to send a payment reminder letter to customers who are late. If it doesn’t work, pick up the phone and call them.
Make certain that all information on your invoice is clear, simple, and detailed, especially the payment due date.
3. Create and use cash flow forecasts
Creating and using cash flow statements regularly can tell you how much cash reserve the business will require in the coming months. If a seasonal drop in sales or a one-time cash demand is expected, you can take precautions beforehand, such as setting up a line of credit.
4. Offer various payment options for customers
With Invoice24, you can include an online payment link directly on your invoice. By offering your customers various online payment options such as accepting credit cards, debit cards or mobile payments, they are likely to pay you faster.
5. Reduce operating costs
If your consumers pay you within 60 days after receiving a product or service but you pay your suppliers within 30 days, you will have a 30-day period when you have paid more money out than you have recouped. If not planned for, this will easily result in a cash flow deficiency.
Your suppliers may be willing to extend your payment terms if you have a positive payment history. This would allow you to keep the money for a more extended period and lessen the possibility of bankruptcy. Most suppliers would rather extend their payment terms than lose you as a customer.
6. Encourage early payments, while discouraging late payments
Slow-paying customers can harm a business. When customers fail to pay on time, you lose your profit as well as any money you spent on the job. You can solve this problem by:
- On each invoice, layout the payment conditions and expectations
- Request a deposit or full payment ahead
- Send invoices fast and accept different payment methods
- Send out automated payment reminders for overdue bills
- Charge a late payment fee