Cash flow is the most important thing to keep a business alive – whether you’re a startup or a business running for years. However, you can never know when cash flow will become slower than usual. This can be detrimental to your business as you have to pay suppliers, contractors, staff and other overhead costs on time.
On the positive side, there are many cash flow tips and tricks that keep your income steady no matter what situation you are in. Follow through with these strategies and you’ll never have to worry about how you can keep your business afloat during tough times. Here are the top 10 tips for better cash flow for small business owners.
1. Use Tools to Track Your Cash Flow
An effective way to stay on top of your finances is to use software or apps that track the inflow and outflow of money. It’s a vital step to manage your cash flow and not go overboard with expenses. Use tools such as Cushion, UpYourCashFlow, Pulse or Float that can give you a clear overview on where your money is going.
Determine the factors which cost you more money, and lessen those expenditures. Find a way to streamline your operations so that you can increase your profit margin. You should earn more than what you spend, and mitigate unnecessary spending.
2. Offer a Variety of Ways for Customers to Pay You
Provide a variety of payment methods to your customers. Check out the field if there are common payment systems that most people are using. Take for example Paypal or other online banking payments that people are using in your locality. The more options you offer, the more likely it is that a customer will pay you immediately.
You can try cash-free invoicing, which is fast and convenient for both parties. Do consider including bank deposits, bank transfers, credit or debit card payments, check or cash payments in your business as well.
Take a look at the following payment options which can help you get paid faster:
A nifty tool like Square enables business owners to take card payments on the go with the Square Reader device. You’ll be able to accept payments using credit card, debit card, and mobile payments. It also tracks your business inventory and sales. The money you earn from sales will be deposited into your account in 1 to 2 business days.
Paypal has this offering which uses a small card reader near your electronic device to accept payments via Mastercard or Visa. The app is free, but you’ll have to pay for the go card reader, which costs $149 or the PIN card reader available at $99. A small percentage of the transaction will be deducted from you. You can also send invoices to customers from your smartphone, process refunds, and itemise orders using this tool.
3. Make Payment Terms Clear
If you are under negotiations for a new deal or renewal of contract, make sure that you and the client come into an agreement on the terms and conditions. Clearly present details such as the nature of work, how much it would cost, and when the payment is due. Get these terms into writing and make sure that everything is signed. This way, it would be hard for deals to be broken and prevent you from losing out on payments. It will get everything straightened out before you start working on a project.
Here are some tips that can help you clarify payment terms to your customers:
You also have to assist your customers in understanding the payment terms and methods they can use. Allow them to ask as many questions as they can when it comes to paying you accordingly.
Another good way to get paid with less risk is to request for advance payments. This will uphold trust between you and the customer. See this as a form of downpayment for you to fulfill their orders or requests. When the job or project is done, you can request for the other half of the payment.
You can also give incentives for early payments, such as discounts or promos, to motivate them in paying as soon as possible. When you encounter late payments, enforce late penalties so that existing and new customers will avoid missing payment deadlines.
Research suggests that the average customer will pay two weeks late. It is then a good idea to set the deadline two weeks ahead before you actually need to be paid. If you want to be paid within 30 days, set a 15-day deadline for the payment.
4. Match Receivable to Payables
Take a look at the payment terms of your suppliers or contractors, and the payment terms of your customers. If your suppliers require you to pay earlier than you require customers to pay you, you’re creating a gap in cash flow.
Match your supplier’s terms of payment to your customer terms of payment. When it’s time to pay your suppliers, at least you’ll be able to cover it with incoming cash from your customers.
Take note of the penalties that your suppliers charge for late payment. Can you also apply it to customers who pay late so that you can make up for supplier penalties? Late payment charges can be an incentive for customers to pay on time, the same way that you can also pay your suppliers promptly.
5. Managing Invoices for Your Cash Flow
The traditional method of printing paper invoices and mailing them is becoming outdated. It also leaves a lot of room for excuses such as customers not receiving it, the postal service not sending it properly, or the invoice getting lost along the way. Embrace the current online systems that can conveniently generate invoices for you and send them to customers who can pay it online immediately.
Here are some ways to hack your invoices:
Any good invoicing software will remind your customer until payment is accomplished. This helps you focus your time and energy to do other important things rather than manually chase and remind your customers to pay. There are also cloud accounting software available which helps you send your invoice from any device. Electronic invoices also have options to customise your invoices and make customers pay you in just a few clicks. It also helps you track which customers already paid and how much they have given. On top of it all, make sure that you send your invoices immediately so that you can get paid sooner.
Create Beautifully Designed Invoices
If you are still required to send paper invoices, a sure-fire way for customers to not ignore you is to create professional-looking invoices. Include your business logo, branding elements, contact details, and other essential information. These things should be easy to look at and read through so that your invoice will be given importance.
When your customer is a big establishment or government body, ensure that the invoice is addressed to the specific person and department so that it won’t get lost in a pile.
Factoring Unpaid Invoices
Consider factoring unpaid invoices if you’re concerned about meeting your overhead costs. Factoring involves an invoicing company that pays you a percentage of an account receivable (usually 70% to 90%) so you don’t have to wait to get paid by a customer. Once the invoice has been paid, the invoicing company will pay you back the remaining payment, minus fees and interest.
The invoicing company takes on the responsibility of collecting invoices from the customer. This can help improve your cash flow so that you can keep running your business. Do take note that going for this method can create additional costs as the invoicing company will charge fees for this service.
6. Liquidate Assets for Extra Cash Flow
Do you have stocks or equipment that you no longer use? Why not sell these assets for a quick buck? Idle equipment or obsolete inventory ties up capital that you can actually use more productively.
Equipment that has been owned for a longer period can have a price equal to its salvage value or less. It can also be used as a taxable gain that can be reported in your tax filings.
Excess inventory that has become obsolete or worthless due to changing consumer needs can also be sold for a discount. Sell any inventory which is unlikely to be used for the next 12 months. You can come up with a promo or sale and market it relentlessly to let go of stocks taking up space, while still earning some money from it.
Always Have Back Up Money
You have to make sure that your business always has enough cash for working capital needs. It’s highly suggested that you keep three months worth of working capital in the bank, just in case of contingencies or slow cash flow. Having buffer money in the form of personal funds, overdraft or revolving credit can also give you a safety net in the form of backup funds.
Have a Contingency Plan for Late Payments
Besides the tactic of imposing late payment penalties, there are other ways that will push through your right to be paid accordingly. Send gentle reminders first regarding their unsettled bills. If they still do not follow through, you can start a stern demand for the late payment. Your last resort would be legal action if the customer hasn’t paid you for a long time.
You also have to check the local laws regarding the collection of money. Follow the legal process involved. This, however, is the last step when it comes to getting the money owed to you. It can be quite a tedious job, so you also have to see things in a wider perspective – whether pursuing a non-paying customer is still worth it.
Fixing Cash Flow Problems with Financing
You can go for short-term or long-term financing to stay ahead, especially when cash flow is tight during a certain period. Short-term financing includes small business loans or lines of credit that can be used for emergency expenditures or to close the gap between payables and receivables. Banks also issue business credit cards that you can pay to suppliers, vendors or contractors.
Long-term financing can be used to purchase equipment and real estate property. Go for equipment financing when you need to take on a loan to pay for equipment and repay it through installments. This allows you to spread the payments over the average lifespan of assets. You’ll have to pay for the interest, but at least you can preserve your working capital for the daily operations of your business.
Set Aside Some of Your Cash Flow for Other Investments
With the revenue your business earns every month, consider saving it in interest-earning accounts. From this you can keep your money growing even if you’re not using it for working capital. Part of your savings can also go to stocks or mutual funds, which will grow your money as passive income. Having different income streams in the form of active income from your business and passive income in other investments will give you various opportunities for financial growth.
How to Get a Cash Flow Loan
A cash flow loan helps you bridge the gap between outgoing and incoming finances. A loan like this is perfect for short-term financing needs, and helps you run your business smoothly. You won’t have to worry about customers paying late or cash flow being tight at the moment, as a cash flow loan will give you the solution you need at the present.
Getting a cash flow loan will need certain business documentation for you to apply. You’ll most likely get an approval if you show the lender a positive monthly cash flow and a good credit score. However, there are also lenders out there who have lesser requirements for you to get a cash flow loan. Take for example Bizzloans Australia which offers a variety of financial solutions. We match you with the most suitable lender and business loan to cater to your business needs. Start getting a quote by clicking the button below to get your loan applications approved quickly.