How to Improve Cash Flow in Your Small Business
Running a small business isn’t easy. There are a million and one things to think about, from finding new customers to increasing your profit margins. If the business is growing, you are definitely heading in the right direction, but what happens if your cash flow dries up because some clients are late paying their invoices?
Invoice financing is a simple way to improve your cash flow. In theory, customers should pay their invoices long before the due date, but this doesn’t always happen. If you have one outstanding invoice, it shouldn’t cause too many problems, but if you have several, your cash flow will be affected – especially if suppliers are chasing you for money.
When you use an invoice factoring company, you turn your unpaid invoices into cash. The company gives you the cash value of the invoice, minus a fee. Invoice factoring can really help your business if you invoice customers, but if customers pay cash, it isn’t an option.
Increase the Business’s Credit Limit
Short-term cash flow problems can easily be solved by asking your bank for an extended line of credit. Most banks are happy to offer established businesses an overdraft facility, so take advantage of this when you need some extra cash flow. As long as you don’t overextend your overdraft, which might spark concern at the bank, you should be fine.
Be aware, however, that new businesses will find it harder to persuade a bank to give them a decent line of credit. Most banks are a lot more cautious after the 2008/9 financial crisis and they don’t lend as easily.
Credit Check New Customers
You should always run credit checks on new customers, especially if they intend on placing a large order. Just because someone seems nice, it doesn’t mean they won’t try to rip you off. Credit checks should reveal any previous credit problems or looming bankruptcy. This will protect your business from non-paying customers that could disrupt your cash flow or even sink the business.
Keep On Top of Credit Control
Issuing invoices and forgetting about them is not the smartest way to run a business. Instead, implement a reactive credit control system whereby invoices are followed up with a reminder letter as soon as they become overdue. This will help to remind forgetful customers to pay their bills. Do not wait months to act after a customer has defaulted on their invoices. If written reminders and telephone calls do not help, pass on the debt to a debt recovery agency.
Use a Business Credit Card to Pay the Bills
Business credit cards are very useful. Paying bills on a credit card means you enjoy up to 56 days interest free credit. Make the most of this interest free period as it will help to improve your cash flow. Always shop around for the best deals before you apply for a business credit card – interest rates vary between different lenders.
Monitor Cash Flow Closely
Running a small business is more than just pulling in orders and banking the cash. It is very important that small business owners stay on top of the bookkeeping at all times. There is an old saying: ‘watch the pennies and the pounds take care of themselves’. This is very true, maintain regular accounts and run cash flow projections at least once a month. That way you will be in a stronger position if an unexpected bill comes in.
Keep a Cash Reserve
We can all benefit from a healthy savings account and small businesses are no exception. Ideally you should always have a decent amount of cash sitting in a reserve account, just in case any expenses you hadn’t planned for crop up. Obviously this is not easy to do in the early stages, since any extra cash will be spent on growing the business, but once you are established, concentrate on building a reserve rather than paying out hefty dividends. That way the business is protected in the event you hit hard times.
Cut Business Costs
Reducing expenditure is not the most obvious way of improving cash flow, but it is one of the most effective. Luckily it is relatively easy to do. Shop around for suppliers and take steps to reduce your utility bills. Where possible, spread payments for expensive capital items and rent rather than buy.
Without positive cash flow, you can’t pay your staff, bills or suppliers. Follow the tips above and don’t let poor cash flow ruin your business.