Improving Cash Flow in Your Business
Cashflow is the flow of money in and out of your business and is not the amount you invoice or the amount owed, it is the actual payments you receive and the actual payments you make.
Many businesses suffer from poor cash flow. It can be difficult to balance the monies going out of your business with those coming in, especially with suppliers expecting payment quickly and customers wanting longer payment terms. Many profitable businesses have closed down due to poor cash flow. Fortunately there are a few methods of improving your cashflow.
- Factoring. This is a process that gives you up to 90% against unpaid sales invoices minus a small fee paid to the factoring company. The remaining balance then becomes available once your customer pays their outstanding invoice. So, if you can't wait for an invoice to be paid, factoring may be the answer.
- Professional credit management. If you find yourself swamped under the usual tasks of running your business, from negotiating new deals, getting new customers, managing staff, deliveries and fulfilment, the administration part of controlling cash flow may take a lower priority.
- In which case it may benefit you outsource your credit management to a company who will send out statements and reminders to your customers. Such companies (who also provide factoring services) can also gather credit reference information on new clients, to ensure they have a reliable credit history and will be able to pay you.
- Improving cash flow yourself by buying larger items before the end of a VAT period instead of at the start of one, or by agreeing fairer payment terms with your clients.
In her book, The Small Business Start-Up Workbook, Cheryl Rickman provides the following tips to manage and improve your cashflow:
- Agree terms before taking on work. Be aware of new Late Payments legislation for small business.
See www.Bepaidontime.co.uk or www.Promptpayers.com to learn more
- Lease or rent/hire where possible as paying instalments can conserve immediate cash flow
Check you can afford large purchases in good time, and that you have the funds to grow the business. Figure out the working capital that would be needed to fund a 10 or 20% monthly sales increase, so that your business only grows at a rate that you can afford to finance comfortably. Restrict growth or seek additional working capital where necessary.
- Invoice as soon as possible and say thank you for early payments. One trick is to send a sweet with the invoice to entice early payment, or include a stamp.
- Improve cashflow in the short-term by offering time-sensitive incentives to customers to buy sooner rather than later, or pay quickly (discounts or freebies).
- Focus on lead generation rather than brand awareness when marketing.
- Pay commission on receipt of payment rather than receipt of order or invoice, to delay payment of the commission and encourage customers to pay promptly.
- Don’t give out more credit than you could afford to lose as a bad debt. Monitor late payments.
- Identify seasonal peaks and troughs and aim for good stock control, keeping just enough stock to service your customers. Aim to speed up stock delivery times and sell off any old or unused stock if necessary, to raise extra cash during periods of poor cashflow.
- Speak to your accountant about any tax breaks, such as capital allowance claims for IT expenditure or computers. Also see if your local authority provides grants for Broadband.
- Reduce costs, increase your prices, sell more, or try all three.
Download our Monthly Income & Expenditure Statement
Ltd Companies
Ltd Companies: Budgeting-Cash Flow
Ltd Companies: Factoring Factsheet
Ltd Companies: Invoice Discounting
Ltd Companies: Improve the cash flow of your business
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