Cash flow refers to the inflow and outflow of funds within a business. If you’re running a business, its measurement is critical to the long-term sustainability of your company. However, don’t confuse cash flow with profits since they’re not the same thing. Profits, on the other hand, are what’s left after all of a company’s expenditures are deducted from its earnings.
When cash flow issues persist, it may be devastating for your company as you don’t get a steady flow of actual cash. Studies have linked cash flow problems to business failures and bankruptcy. One study shows that two-thirds of newly established small companies only survive two years, and 44% last only four years. (1)
Business analysts agree that a lack of capital is one of the primary causes of small company failure. It goes alongside inexperience, bad location, and ineffective inventory management.
Even seemingly successful companies can be hampered if there are recurrent cash flow issues. For instance, you won’t be able to pay your bills unless your clients clear their cash invoices first. In other words, even if you have a lot of clients – but they don’t pay on time – you may still have cash flow issues.
Fortunately, if you’re having difficulty maintaining cash flow in your business, there are helpful techniques you can begin adopting to address this immediately. Also, thanks to smart technology, you can start using specialist business management apps like this one from Jobber which is designed to support field service businesses, or others like it within your industry, to help you manage your cash flow better.
The following techniques will support you in getting paid faster and maintaining regular cash flow:
1. Offer discounts on early payment
Offering a rebate or incentive to clients who pay their bills early creates a win-win scenario for both sides. For example, if your terms of contract state that payment is due 30 working days after the invoice is issued, but you prefer your clients pay their bills within the first week of receipt, give a modest rebate.
Clients on the lookout for a bargain will also be more inclined to pay their bills promptly. Subsequently, receiving the money earlier than expected is beneficial for you.
2. Send invoices out immediately
For small businesses, sales and invoicing are vital. Failure to send invoices may result in non-payment. This means that you have to ensure that you keep track of your clients’ invoices. The sooner you send out their invoices, the sooner cash may flow in.
However, make sure you know the fundamentals of how to create an invoice specific to your business. If you’re a plumber, or work in the field service industry, research best practice to understand how to create a professional invoice. In general, your invoices should be intelligible and clearly explain the conditions of your agreement.
Make sure to include the due date, preferably in bold. Put it in more than one place, such as the top and the payment slip on the bottom. Furthermore, provide detailed information about the accepted payment methods. It’s also important to mention any late payment fees you may impose. (2)
3. Manage your accounts payable process
In addition to invoicing, you must also ensure that your company runs as efficiently as possible. Concentrate on time savings rather than cost reductions. Evaluate all of your existing business processes to determine their efficiency and if they may be accelerated. One crucial process to check is the accounts payable.
You can improve your cash flow by structuring and managing your accounts payable process. Investment into account management software such as Jobber mentioned above, cleverly allows you to set up online payments which lets customers pay from a link directly in the invoice. By simplifying the payment process as much as possible for your customers, you will be rewarded with faster payments.
In addition, track which invoices are the most urgent. This will help your team prioritize payment reminders and keep an eye out for overdue bills.
4. Improve your inventory
Inventory is among the most significant company expenditures you’ll have in business. You require inventory to generate revenue, so you have to ensure that the inventory you purchase has a high-enough demand.
To improve your inventory, consider which goods sell quickly and which are difficult to turn over. Analyze your sales trends to determine your peak and off-peak sales periods and purchase goods accordingly. (3)
Make a note of the items you purchase that aren’t selling quickly. They can eat up a significant amount of cash and may adversely affect your cash flow. Liquidation is also an option if you’re having trouble disposing of any obsolete inventory. Any revenue is better than none at all.
5. Pay your suppliers strategically
When it comes to paying your suppliers, you should be as strategic as possible. If your supplier provides a discount for paying early, take advantage of it. If the supplier doesn’t offer a rebate, pay when it’s most advantageous for your company.
Keeping in touch with suppliers regularly may improve your chances of negotiating better terms. Negotiation skills are critical in business and may help you persuade suppliers to lower their prices, which could give you an edge over your competitors.
Bottom Line
A good cash flow is the consequence of efficient and seamless business processes. There are many ways to increase cash flow, but focusing on invoicing, inventory, and negotiation is the best strategy. In addition to following the suggestions listed above, you’ll want to ensure you’re making the correct choices regarding promotions, sales, customer support, and product development in your company.
Resources:
- “How to manage cash flow”, Source: https://www.inc.com/encyclopedia/cashflow.html
- “10 ways to improve cash flow”, Source: https://www.investopedia.com/articles/personal-finance/061215/10-ways-improve-cash-flow.asp
- “Inventory and cash flow” Source: https://www.entrepreneur.com/article/21846
