Cash flow is the lifeblood of any business. According to a recent study by NFIB, 82% of companies fail because of poor cash flow management.
If you’re having cash flow problems, they need to be addressed immediately.
In my experience, most business owners recognize the importance of positive cash flow. However, most of them simply don’t know how to fix those problems.
That’s what inspired me to write this guide. The tips and best practices that I’ve identified below can alleviate some of your cash flow concerns. You can start implementing some of these tactics immediately.
1. Create a Cash Flow Forecast
Forecasts are a crucial component of any small business bookkeeping department.
You need to take the time to analyze the cash coming in and the cash going out. Based on these numbers, you can predict how much money you’ll have on hand in the short-term as well as the long-term.
Without proper cash flow analysis, it’s impossible to make critical financial decisions. Whether you’re taking out a loan, buying new equipment, or leasing a vehicle, you need to make sure that you have enough cash coming in to make your payments.
Lots of times, businesses get into trouble with cash flow problems because they made a significant decision without referring to a cash flow forecast.
2. Offer Incentives for Prompt Payments
Your business might not have problems getting work, but you might have problems getting paid.
If your accounts receivables aren’t being collected in a timely fashion, it can create cash flow problems. This is especially true for work that was labor-intensive or required lots of materials to complete.
In this case, you’re spending money without getting anything in return.
Most invoices are marked with 30 days for the customer to pay. So, by the time it takes you to complete a project, send a bill, and get paid, months could have passed.
But you need cash today.
You can potentially offer your clients an incentive to pay invoices early. For example, offer a 2% discount on invoices paid within seven days of receipt or possibly 5%-10% off invoices that are pre-paid.
Most customers will be happy to pay immediately to get a discount like this. So, it’s a win-win for both parties.
Discounts should not be random. Don’t allow your cash flow problems to significantly cut into your profit margins. That will create even more problems for you. So whatever incentive you decide to offer, just make sure you’re making enough money on the job.
3. Enforce Late Fees
Do your invoices have late fees?
Some of you might not put late fees on your invoices because you don’t want to give your clients the wrong impression. However, without late fees, customers have no incentive to pay on time.
If there are no consequences for paying late, you might not collect receivables for months after the initial due date.
In addition to including late fees on an invoice you should also enforce them.
As soon as an invoice becomes past-due, send a follow up invoice with a new balance. The new balance should reflect the original amount, plus the late fees. Itemize everything accordingly, so your customers understand why they were charged a certain way.
You may experience some customers who pay the invoice late, but don’t include the late charges. That’s OK. I wouldn’t make a big deal about that. Moving forward, there’s still a good chance they will pay on time to avoid those extras fees.
4. Reduce Expenses
It sounds simple, but you’d be surprised how many businesses are paying for unnecessary expenses.
Run an internal audit on your books to see where cash is being spent. How much cash is being allocated toward things you can survive without?
You might even discover expenses that can be put off to a later date. For example, your business obviously needs inventory to survive. But you don’t always need to buy stock for six months or a year in advance.
I understand that you can get a better rate by buying in bulk, but that discount won’t help your business if you run out of cash before you can sell that inventory.
It might be worth it to pay a little bit more for inventory if it means keeping extra cash on hand today.
5. Negotiate with Creditors
Most businesses have some type of debt on their books.
If you’re having severe cash flow problems, it might be time to try and renegotiate the payment terms with your creditors.
Ask for additional time to pay back what you owe. You could even try to ask them to reduce the overall balance due.
Creditors are more likely to negotiate these terms if it increases their odds of getting paid back in full. So just explain that it will benefit both parties if you can negotiate the terms.
This strategy will not always work, but it’s still worth trying.
6. Improve Your Invoicing Process
Businesses can run into cash flow problems if they don’t have an effective invoicing process.
Something as small as waiting too long to send invoices to your clients can be detrimental to your cash reserves.
You don’t always have to wait until an entire project is complete to send an invoice. If you’re upfront about this from the beginning, you can bill your clients throughout different stages during a project.
Try using technology to automate your invoicing as well. Give your customers a wide range of payment options, such as accepting credit cards online. If you’re forcing customers to complete a wire transfer or write a live check, it will delay your payments.
7. Increase Revenue
This is obviously easier than it sounds. If every business could increase its revenue on-demand, they would never have any cash flow problems.
But you should explore the possibilities of adding new services, products, or charging more for your existing offerings.
Come up with ideas that are cost-effective. Slash prices and run a sale on old revenue to get cash fast. While this might not be a long-term solution, it can put funds in the bank today.
If you can find ways to boost your revenue without increasing your expenses, the extra cash could be enough to fix your problems.
8. Seek Professional Help
If your cash flow problems are overwhelming, it might be time to consult with an outsourced CFO or bookkeeping service.
A professional with experience and a trained eye can assess your situation and offer advice on how to repair cash flow problems.
CFOs are experts at coming up with creative solutions to not only fix cash flow issues but prevent them from happening in the future.
Your business needs cash to survive.
But at times, cash flow can be an issue. You’re not alone. Instead of just hoping your cash flow issues will go away, you must take actionable steps to fix those problems.
Follow the tips that I’ve listed above, and seek help from an outsourced CFO service. Contact us here at Navitance for a free consultation.