Like a car without oil, a business simply can’t operate without cash flow. The profitability of the business may look healthy, but as all seasoned small business owners know, it’s what’s in the account not on paper that keeps the weekly operations turning.
It can be tricky to get cash flow right – simply because there are many elements that can affect it: clients; suppliers; your own processes and structures. But one thing can be said for certain, putting in place a few structures makes a considerable difference. If you’re looking for a quick cash flow boost, have a look at some of the quick-wins we suggest below.
The operational basics
Minimise the surprise factor. At the beginning of the year, run your cash flow forecast and update it every quarter. Simple? Yes, and more than likely something you are doing right now. But to ensure your forecasting is really robust, test some potential scenarios. What would happen if your biggest customer didn’t pay? Your terms of trade increased? External costs increased by 10 per cent; more? Running scenarios relative to your business will help identify periods of cash flow stress.
Updating your cash flow forecast every quarter is great for planning, but don’t leave it there. For tight cash flow management, reconcile your bank account each day – checking for payments coming in and going out. There are a number of accounting tools that can automate this for you if you don’t already have one in place. The key is to make the process an easy one to keep on top of, every day.
Build rapport. Be a good customer to your suppliers. It’s good business in any case, but make payments on time regularly so that should you encounter a period of tight cash flow suppliers are more receptive to giving you more time to pay without incurring late payment fees. Don’t be afraid to communicate at these times – if you’ve built up a good relationship the best approach is to call and ask for an extension or to spread your payments over time rather than avoiding the situation.
How well do you know your customer? It’s easy – in particular for small business – to take on new clients without being especially diligent about who you’re dealing with. Before providing services, or even credit terms to your new customer, do a bit of discovery – supplier reference checks etc. Remember, they want your service and handled well, checking them out only shows that your business has sound structures and processes.
Cash flow confidence is largely determined by what you do upfront every time a new contract is signed. Make sure your customer is fully aware of your terms of trade and payment dates before providing the service. Of course there will be circumstances where these are negotiated, but always ensure the terms work with your cash flow requirements.
Make it easy to get paid
Some clients may need to spread their payments over time. It’s best to be flexible in these situations and negotiate payment amounts and the time period. It’s much better to get paid over time, than to not be paid at all.
Get on to bad debts straight away
Often small business owners wear both the customer relationship and accounts hat, which can make calling clients for money an uncomfortable prospect. But push those feelings aside and pick up the phone as soon as a client is late in paying for your services. If your attempts prove unsuccessful or you’d rather distance yourself from the process, consider hiring a debt collection agency – but do some background checks to ensure you’re comfortable that they will represent your company and brand well.
Other quick steps to effective cash flow management
1. Don’t assume that payment needs to be made monthly on the 20th or end of the month. Establish shorter payment terms like 14 days.
2. Negotiate down payments or part payment in advance for work – especially where your business will incur external costs to provide the service.
3. Invoicing is the priority – while day to day business operations may feel more important, getting paid on time is by far the most important job you have. Get invoices out promptly and chase payments quickly.
4. Negotiate extended credit terms with suppliers – this will give you a larger window to receive payment for services to client, before supplier payments are due.
5. Make smaller but more frequent stock purchases – negotiate cost of stock on your annual account, rather than by order amount.
6. Regularly review your profitability. Get into the detail of your costs of sale, including operational costs, marketing etc: are your profit margins what they should be?
About Fifo Capital
Fifo Capital is an expert at providing invoice finance solutions to businesses at all stages, from start up to maturity. We offer 1:1 service and work in partnership with you to build smart solutions that support both the short and longer term success of your business. Find out more about our invoice finance solutions here