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To run a business successfully, you must master fiscal management. That means learning how to manage your cash flow to ensure your business grows well. Even in a challenging economic environment, there are things you can do to make sure that you're moving in the right direction. We have created a blueprint for optimising your cash flow so you can take control of your small business's financial situation.
When you're first coming to grips with your cash flow, it's important to pop the hood of your business and make sure you understand some basics. Start off by looking at:
Clearly analysing these factors will reveal key differences in the cash you will have for spending and the payments you will need to make for both inventory and services. Every cash flow gap that you can identify is an opportunity to take control of your business and secure it for success.
One of the difficulties of running your own business is maintaining a steady cash flow. You may struggle with customers who do not pay or, if they do, they do not pay on time. The good news is that we have a handful of strategies that you can employ to ensure prompt payment. This will benefit both you and your customers.
The reason why some customers do not pay on time is that they find the terms unclear. From the start, be sure that both you and your customer are clear on the terms of your agreement. If the customer knows what their obligations are, you can avoid “surprises” in later transactions. You and your customer should agree on the following things:
If it is possible, with the nature of your transaction, to set a fixed periodical rate and a consistent schedule to demand payment, then do so. When they pay a fixed rate, the customer knows how much to pay periodically and they will not have to spend time reviewing the invoice. Both of these things will be the same each time. This will make things easier for you as well as the customer. It will also allow you to perhaps set up an automatic invoice if you are using cloud-based accounting software.
It's a good idea to ensure that this agreement is in writing. This way, in the worst case scenario where your customer still will not comply with the terms, you can pursue legal remedies.
By asking for the payment upfront, you will not have to worry about delayed payment. Unfortunately, not all customers are willing to part with their hard-earned money without knowing whether your services or products are satisfactory. In that case, you can adjust this with alternative payment schemes.
For instance, instead of asking for the full amount upfront, you can ask for a downpayment. For example, you could charge around 50% of the rate upfront and the remaining 50% after completion of the project or delivery of your obligation. You may also choose an instalment scheme, wherein for N number of products or deliveries, the customer pays a designated proportional amount.
Often, customers do not pay on time because they also do not receive invoices on time. If you don't communicate with your customers in a timely fashion, they may not prioritise dealing with you in a timely fashion, either. You should also consider that some customers are businesses with lots of moving parts. Some businesses have intricate systems that require some time to elapse before they can release the money for payment. This is why we recommend that, if possible, you send your invoices in advance so that the customer has time to process it.
In keeping with the theme of timely invoicing, one of the best ways to make sure that your client receives invoices on time is to use cloud-based software. There are several cloud-based bookkeeping software options that allow you to send invoices immediately.
You can even set your software to send invoices automatically, especially if the rate is the same every month. The brilliant aspect of this strategy is that some software products allow for payment options through third-party applications. This means that customers can easily make payments by simply clicking a link as soon as they receive the invoice. You may also scan receipts and other documents and have them sent directly to the customer. When your payment system is as seamless as possible, you increase your chances of your customers paying on time.
Some customers are businesses with multiple employees. It is crucial to find the right person to receive the invoice. Otherwise, it may get lost in the hands of a person who does not know what to do with it or it may be lost due to bureaucracy.
It is also important that the wording in your invoices is polite and professional. You can consider framing the request as a concern that the customer might not be clear on how to make the payment rather than you demanding it.
People respond to reinforcements. By rewarding punctual payment, you are able to reinforce this good behaviour and ensure this behaviour is repeated again. An example of an incentive may include a discount.
In the same way, your customer must know that you will not tolerate late payments. Late payments, if met with a penalty, will incentivise customers to pay on time to avoid incurring additional liabilities.
Aside from reducing friction when it comes to making payments, one way to encourage customers to pay on time is by having good working relationships with them. Customers, when made to feel like they are valued, will naturally want to return the kind treatment and pay on time. It is best if you can establish a pleasant relationship from the very start. Consider being generally warm to them in your meetings, addressing them by their names and perhaps sending little tokens of appreciation every now and then. For more tips on how to build killer relationships with clients, read this article from Entrepreneur.
These are just a few of the many things that you can do to ensure that your customers pay on time. As long as you provide good services and products and make payment methods easier for your clients, then you put yourself in the best position to get paid on time.
Accounts receivables represent sales that were made but have not yet been paid for. To manage your cash flow, you must know the negative effects of extending credit. By the time your customers actually pay up, you will have probably had to pay suppliers or your employees. You may have also lost the opportunity to expand operations at an earlier, more opportune time!
Take a look at your credit terms. What are the policies you set when extending credit? How do you set the limits on credit (for example, do you set deadlines for payment and collection)? What are the processes? All credit terms affect the timing of cash flow into your business. Are you comfortable with high and dry lean seasons that routinely come into your business? Is your business affected by seasonal ruts?
Establishing correct credit policies ensures that your cash flow won’t surge then dry up or get all dammed up with creditors or the banks. Many businesses routinely offer trade discounts, on longer or shorter terms, to improve their cash flow during such times. Re-thinking this will position your business at the head of your given industry at a time when businesses which would have once seemed immune to adverse trading conditions now seem very vulnerable.
The real value of a business can be evaluated in terms of cash value only or based on other factors, such as:
Traditionally, however, accountants divide their methodologies into cash-on-hand or accrual accounting based on how money flows into a business. They routinely encourage business owners to ensure a healthy cash flow by projecting how and when to use their money.
Despite the amount of money flowing into or out of a business, value is also assigned to its physical assets. Among these assets are of course the goods you deal in. Examine your need for keeping inventory and just keep what you need for the smooth operation of your business. Did you buy on credit? When you purchase your goods or services on credit, your business creates accounts payable that you owe to your suppliers, usually within 30 to 90 days.
Just as you paid close attention to the payment schedules of your clients, re-examine how you schedule your own payments. As your business grows and as profits increase, don’t automatically expect your bank balance to grow – it may, but in the coming year, smart cash flow management may be the best security for surviving these nervous and uncertain times for trading.
Your cash flow doesn't have to be the metaphorical thorn in your business's side. With a bit of planning, you can improve your cash flow and stay on top of your finances.
If you need help, the expert bookkeepers at Darcy Bookkeeping are just a phone call away. Drop us a line or give us a call at 1300 728 875.
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