6 Tips small business owners can use for better cash flow
In business, cash is the proverbial king. Whether you’re a fledgling start up, a small business or a huge corporate, managing cash flow is rule 101 when it comes to running a business.
However, despite this, according to a study by US Bank, 82% of small businesses fail because of cash flow problems and 54% of SMEs in the UK say poor cash flow is the main reason they struggle to grow their business.
Here we share 6 tips you can start using in your business today to help improve cash flow and safeguard the interests of your business.
1. Use your full credit terms
Businesses may pay a creditor immediately because they want it off their desk or they simply want to be nice. Sure, paying early is most likely going to help a micro-business. In other circumstances, take the opportunity to use your full credit terms – very few businesses care if you pay early and you can guarantee they’ll be using their full terms, if not exceeding them.
2. Forecast cash flow on day-to-day movements
Many businesses fall into certain traps when it comes to forecasting cash flow. A natural assumption to make is if you set your payment terms at 30 days notice, then you forecast your cash flow based on people working to these 30 day terms.
The best customers will pay you in 30 days, maybe a few days before if they’re really keen. However, there will always be a proportion of your customers who will be late. In some cases they’ll just pay when they’re ready.
The best tip for forecasting cash flow is to work on day-to-day movements. If your wages are paid on the 6th of every month and your main client pays you on 7th, you’re likely to have an issue if cash is tight. A monthly cash flow forecast wouldn’t suggest there is a problem at all, whereas forecasting cash flow day-to-day would highlight this potential issue.
3. Use real evidence and historical figures to set realistic sales forecasts
This is always going to be a little difficult and perhaps daunting in your first few years of business, but getting into good financial habits at the start will not only help with forecasting sales, but it will also set the foundation for your future years in business. This means solid bookkeeping practices and using management accounts to help forecast sales using historical data to provide greater insight into other areas surrounding your business.
4. Use the many software tools that are lifesavers for small businesses
With accounting software such as Xero, Quickbooks and the aptly named KashFlow available at your fingertips, as well as countless apps that plug into these systems, it’s a crime for small business owners in this day and age to not take advantage of the software and technology they have at hand.
These tools are designed with small businesses in mind to ensure business owners can easily stay on top of cash flow in real time. Built-in invoicing software will help you to get paid faster. If payment isn’t so forthcoming, you can schedule invoice reminders to customers when an invoice is overdue and apps such as Reciept Bank and AutoEntry make manual data entry for things like receipts, invoices and statements a thing of the past. A combination of your accounting software of choice along with some handy apps will give you a more transparent overview of your financial position.
5. Put an internal process in place to avoid late payments
Even with the latest online invoice software in place, there will always be some customers who will pay late. It’s one of the main reasons small businesses will suffer from cash flow issues. Set clear payment terms with each of your clients at the start of a working relationship. If this is clearly agreed before any work is completed, you’ll avoid any misunderstandings further down the line.
It’s important to follow a clearly defined internal process or system for chasing and managing late payments should the situation arise – this is essentially your credit control processes. Some businesses might include penalties for late payment, which would usually be taken with the view that you’re happy to lose the client for good.
6. Regular contact with your customers will go a long way to avoiding late payments
Paying late is always going to be difficult (and socially awkward) if you’re having regular contact with your customers. For businesses with smaller customer bases, this could as much as a phone call. Equally, it could be as simple as a personalised thank you note for their custom or for when a payment is received – regardless if it’s late!
Chasing invoices and payments is never easy which means it can often end up being the last chore on a to-do list. However, getting paid quickly is so important for a healthy cash flow. Getting into good habits with your finances will inevitably have a positive effect. Make sure you’re following the right processes for forecasting cash flow and when it comes to getting paid, grab the bull by the horns!