Cash flow is one of the most important factors in a business’s day-to-day running, regardless of how successful it is or how many sales the company is generating. The rationale is that even if there are thousands of sales, there could still be a gap when payments are received and bills such as wages are due. That gap can be enough to place a business at risk and highlights the need to track cash flow carefully. Here’s how to ensure your business maintains a strong cash flow.
Invoice quickly. When you are owed money for a job you completed, one of the most important things you can do is to invoice promptly. Set time aside to deal with invoices each week and keep a tracking record. Include your terms and conditions on the invoice, especially the date the payment is due. If you delay your invoicing, you immediately create a weak point of cash flow in your business. And if you delay your invoicing by several months, the customer may have moved away or gone out of business, making it harder for you to get paid.
Use a factoring company. If you have ever asked yourself what a factoring company is, you may find they can help you significantly improve your cash flow. A factoring company will chase invoices and manage situations where people do not pay on time. It saves you a lot of work, but most importantly, it can help you get your business on track with strong cash flows. Some are industry-specific, so they have in-depth knowledge of a sector. They do take a commission from invoices they chase, but it improves your finances in the long run. Invoice factoring is a priority if you find it hard to keep on top of your payments.
Take a deposit. If you have clients requesting large jobs, take a deposit upfront so you can pay for material and ensure you have a good cash flow to pay wages. This works well when you have to order things in advance, such as construction materials or a service like a wedding. If there is a cancellation, your loss is minimal. If you have a long project coming up, take a deposit, but also schedule an interim payment so you can keep your cash flowing — and ensure it is in the details of the contract.
Lease in place of buying. Another good way to keep your cash flow in good shape is to lease equipment or premises instead of buying them outright. Usually, one-off costs for expensive equipment eat into the cash flow and are expensive. By leasing, you spread your costs using smaller payments and you can also avoid large maintenance costs. And there’s another bonus — leasing costs are tax-deductible, so can be offset against your expenses.
Join a buying co-operative. Purchasing goods can be expensive and drive up your costs. As a single business owner, you have relatively little influence on price negotiation and may have to buy a large quantity of an item to get what you need for a job. All this influences your cash flow in the business. Purchasing co-operatives are when a group of like-minded businesses collaborate so they can share costs and negotiate from a stronger position. Examples include stationery and office supplies, construction materials and other items that would otherwise eat into costs.
Offer discounts for early payments. Encouraging early repayment initiatives is a great way to give the customer a good deal and also keeps your cash flow healthy. You most probably have a time window of up to 30 days for the customer to pay their bill. Giving them an opportunity to settle within seven days for a discount could be very attractive — and hopefully will encourage them back with more business.
Review your business. One of the most important things to do when managing cash flow is to review your business model and the processes. Are there any unnecessary stages in processing invoices and sales that can be taken out so you get paid faster? Can you see any times of the year when you are having to pre-order goods that are affecting your finances — and that could be spread throughout the year? Another area to consider is staff costs, so reviewing them to ensure you have the right skill mix to do the work will help utilize your payroll budget effectively. Examples include times of the year when there is high demand for vacation leave and where you may need interim cover. If this was spread evenly through the year your cash flow could be more balanced.
By managing your cash flow effectively and using resources such as invoice factoring, you can operate your company in a more economical way. Your cash flow will work to meet your requirements and not leave you with large gaps in finances.