5 tips for ensuring good cash flow for small businesses
Any entrepreneur worth their weight in VAT knows that good cash flow is essential to the success of any business. When it comes to small businesses, issues such as late invoice payment, or failure to check the financial health of a customer or supplier, can mean big problems for cash flow.
Whilst there are services out there to help out with checking financial stability of both customer and supplier, as well as monitor credit and payment performance, it’s important you understand the basics of cash flow before forming your own company, and have a handle on ways you can improve on it once you’re up and running. Here are our top five tips for ensuring good cash flow for small businesses.
1. Agree to your terms of sale before you do the work
It might seem obvious, and it’s easy to not do it in the excitement of getting a new customer, but it really isn’t a closed deal unless everyone knows who has to pay what, and when it need to be paid by. You don’t want to get the work done, only to find out that your customer always pays on 60 days terms! If you’d have known that before you’d have gone and spent all those hours working away, you may have decided not to work with them, or you might have arrange to have longer terms on payments you might need to make, in order to deliver the work.
2. Invoice promptly and accurately for better cash flow
It’s often convenient to say: ‘I’ll do all the invoicing at the end of the month, all in one go, because it will be quicker for me to crack through it when I’m in the invoicing zone’. In reality, what this means is that the customer who gets your service or buys your product on the 1st of the month gets a whole month’s free credit, because you won’t even raise their invoice for a further 30 days. After that? They have 30 days to pay it. It might be great for them, but it’s not so great for your cash flow.
Invoice as soon as you’ve done the work, or sold the goods. The sooner your customer gets the invoice, the sooner they have to pay it. And it sounds obvious, but make sure your invoices are accurate, so that the customer doesn’t have an excuse to delay their payment whilst you correct your mistake.
3. Offer ‘pay now’ options so you can get your cash even sooner
Why wait 30 days to get your money, when you can get your customers to pay by credit card and give it to you on the spot? Yes, you might have to pay a fee to the card company, but is this really much more than any interest you might have to pay because you’re using an overdraft, or financing the business on a loan because you don’t have the cash you need on hand?
The other option might be invoice factoring, where a third party agrees to buy your unpaid invoices for a fee, and then gives you a percentage of the invoice value up front. Whilst these options might not be viable for everyone, they can help get the cash in the door more quickly.
4. Chase up invoices that haven’t been paid
There’s no point raising all your invoices promptly if you aren’t going to chase them promptly. Before the invoice is due, get in touch with your customer to remind them that payment is upcoming, and check everything is OK for it to be paid on time. This way if there are any issues, you can deal with it before the invoice is actually due.
Get in touch with your customer again once the invoice is due, and get confirmation of when it will be paid. And then, make sure you keep communicating if payment isn’t forthcoming. Whilst it might be unpleasant, this gets the customer into the mindset that they need to pay you, in order to get you off their back. If they think you’re not on top of things, then they might not consider paying you to be a high priority.
5. Think ahead: plan for the known, and the unknown
There are always bills that come in throughout the year which don’t relate to your sales cycle or to a regular monthly payment, such as tax bills, or office refurbishments. So make sure you are saving cash up to cover these costs when they’re due, so that they don’t sneak up on you, and steal all the cash you were going to use for paying salaries or purchasing new stock. Keeping a cash flow forecast up to date will also help with this planning.
Jane Hewitt is Marketing Manager at CreditHQ, a tool that helps manage cash flow for small businesses, including gauging financial stability of your suppliers and customers, and helping you decide which sorts of businesses you’d like to deal with.