5 ways to avoid small business cash flow issues
Positive cash flow is the lifeblood of any business. Cash flow issues can arise from low-profit margins, problems invoicing and collecting payments, and over-investing in inventory. Fortunately, there are sound strategies to help you avoid or mitigate those challenges. Follow these 5 ways to help you optimize cash flow.
1. Why progress payments make sense
When you negotiate contracts with customers, try and set payment terms that to help your cash flow, such as deposits or progress payments. Negotiating regular payments for contracts that take months to complete has two purposes: it provides cash flow to match your expenses and protects you from total loss on a project if the customer goes into liquidation.
If you can include a timetable for the customer to pay invoices as part of any agreement, agree on clear milestones for the work to be completed to minimize the chance of the customer disputing any invoices.
2. The benefits of invoicing immediately
This may sound obvious, but make sure all work is invoiced as soon as possible. Immediate invoicing can make a real difference in your cash flow. It’s even faster if you can accept mobile payments. If you haven’t already, sign up for accounting software to make it easier to send invoice reminders.
If you need to improve your cash flow temporarily, try:
- Offering customers incentives to purchase quickly or in advance.
- Offer early-payment incentives (such as discounts).
3. Reduce the chance of bad debts
An effective way to reduce bad debts is an efficient credit control system. Try:
- Make sure you credit check all customers before offering credit terms.
- Create rules around how much credit your business will provide and to which customers.
- Avoid giving any customer more credit than you could afford to lose if the sale turned into a bad debt.
Send out invoices immediately after you have supplied the goods or service. Confirm that all the invoice details are correct and that there will be no problem paying it by the due date.
- Monitor late payments and follow them up methodically, largest debtors first.
Using a debt collection agency, or a specialist lawyer can be an effective method of dealing with non-payers. There are also a variety of software solutions that can help automate the process.
4. Lower costs while maintaining quality
The best way to lower costs is to implement a simple cost control system across your whole business to help identify scope for cost savings. There are four types of savings that can usually be found if you investigate:
- Reduce or eliminate any unnecessary costs, such as heating your premises at night (if no-one is there). Audit your regular business costs to identify what could be turned off, re-used or cut down.
- Look at your highest costs and check that you can’t source them more cheaply with the same benefits or quality.
- Identify any paper-based systems which could be computerized.
Go through all your suppler agreements and check if you’re missing any volume buying or early payment discounts.
5. Generate more cash from your inventory
If you hold stock, then good stock controls can release substantial sums of money:
- If you hold just enough stock to service your customers on an on-going basis without running out, you can lower the amount of stock you need to hold, releasing this cash for other things. Identify seasonal peaks and troughs so you have enough inventory when you need it.
- Make sure your suppliers can deliver to you when you need it, as the less stock you need to hold the better. If possible, make your suppliers your warehouse and let them bear most of the stock holding costs.
- Focus on your top-selling items and consider selling off any slow moving, old or obsolete stock to raise extra cash (and not re-ordering).
Bottom line: Cash flow solutions come down to being smarter about invoicing, getting customers to pay faster, and cutting expenses when necessary. Used together, these strategies can help you maintain and improve your business’s cash flow.