In a previous article, we discussed the hot topics of cashflow forecasting and cashflow management. This article intends to explore the finer points of cashflow management which can help drive your business to greater heights of success.
As a refresher, Cashflow management is the process of keeping track of how much money comes in and out of your business.
To improve net cashflow, look for opportunities to expedite inflows and delay outflows.
Timing Matters
For a healthy business, timing of revenue streams should be the first place you look to improve your cashflow cycle. This may sound simple, but it is not because every time you change something in the business, other things may change too. This is where cash flow projections and business modelling can help you take calculated risks and avoid unintended consequences.
Improving Cash Inflows
There are many steps you can take to improve revenue streams of the business. See how each of these ideas may work in your business.
Offer Discounts for Early Payment
Are you in a business where you can offer your customers an early payment discount? Many customers would be happy to make use of an incentive to save money.
Consider Gift Cards and Subscriptions
Whether you are in service or retail, you may want to explore the possibility of offering gift cards or gift subscriptions. Both options are purchased prior to any goods shipping or services being performed and can provide working capital cushion to help you grow.
Do a Debtors Analysis
Do you regularly review your receivables aging to analyze who owes you money and how far behind they are? Keeping a careful eye over pending receivables is a worthwhile exercise to improve cash flows and reduce uncollectible accounts.
Send Invoices Immediately
This may seem obvious, but in small and medium sized businesses where the entrepreneur is wearing many hats, there may be a delay between services being performed and invoices being sent to the customer for payment. Even a minor delay can have a major impact on your cash flow.
You should ensure you have a system to issue invoices on the same day that you deliver of goods or services. You may even want to consider utilizing the invoicing and payment functionality that may be embedded in your account software.
Send Payment Reminders
It is a good idea to call or send reminders to customers about overdue payments and due dates on a regular basis to ensure you are clear on collection expectations. Many invoicing software systems have this feature built in.
Mention any late payment fees clearly in your invoices. This will help improve and manage the relationship with your customers. You can also automate sending payment acknowledgements and thank you notes.
Consider Factoring
Factoring is a type of debtor financing where you sell your accounts receivable (invoices pending payment) at a discount in return for immediate cash. Factoring may be a good option if you have immediate cash needs as well as invoices with far out due dates.
Delaying and Minimizing Cash Outflows
Depending on the nature of your business there are many things you can do to improve your cash outflows.
Negotiate with Your Suppliers
- Negotiate better payment terms. Do this will all suppliers, but those with whom you have long term relationships will be more amenable to granting you better terms. Even a few days — say 10 days vs 7 days to pay — can improve cashflow over a long relationship.
- Ask for early payment discounts. When you have cash in hand, offer early payment and ask for early payment discounts. This can save you money in the long run as the discounts can add up.
Consider Price Revisions
Many small business owners are hesitant to raise prices. It is true that revisions should be done with much care and calculation. If you are in a buyer’s market, increasing price may reduce your competitiveness and lead to a drop in sales. But if you have a captive market or where buyers cannot change suppliers with ease or if you are differentiating your offering with value beyond the price of goods, you may have the ability to increase prices.
Before you experiment with pricing changes, make sure you perform scenario analyses to determine the potential impacts of any updates.
Opt for Leasing, Don’t Buy
Large capital investments can be a challenge for small businesses. Leasing vehicles, equipment and even floor space offers a way to better manage your cashflows while growing your business.
Manage Your Inventory Levels
Effectively managing your inventory can greatly assist in freeing up capital. By purchasing the right amount of inventory at the right time, you can ensure you do not lock up a large balance of cash in product that will take time to sell.
Need Help for Improving Your Cashflow Management?
All of the suggestions above, on their own or combined with business forecasting, modelling, and process mapping can bring about efficiencies to optimize your cash flow.
At AccountFWD we guide small and medium sized businesses to discover business efficiencies and improve profitability. If you have questions about the ideas discussed in this post, send us a note, schedule a time to connect, or give us a call 954-686-8687.
