Not all businesses make their profit at their prospective timelines. Indeed, many of them seem to be thriving, but during inventory and sales reviews, business owners realize that their cash flow doesn’t match that of sales increases. What many of them do not understand is that slow cash flow is caused by various reasons, such as overtrading, supply and demand trends, excess stock, etc.
A poor cash flow definitely affects every aspect of your business, regardless how big or small your company is. It not only compels you to borrow funds to keep your operations afloat; it likewise hinders you from enjoying your income.
But how do you improve your business cash flow? You may start with these three simple but effective strategies:
1. Invoice right after a job is completed.
It is a must that once you complete an order from your client, you send them an invoice right away. This is regardless of whatever payment agreement you have, mainly because when you delay your invoice, it will likewise make your client process their payment at a later time.
You should keep in mind that there are clients who take time to process their payments. Some take a week, two weeks, or even a month to release a check as payment for your service. If you do not issue an invoice right after completing the job, then they too will not take the necessary steps to process your payment.
By invoicing right after a job is completed, you not only remind your client to process your payment, but at the same time you can plot the days when your money comes in and allow room to adjust whenever unexpected situations arise. It would be easier for you to schedule payments to suppliers and other entities where you have balances to pay off.
You should likewise send your invoices in a timely manner, such as a week before the agreed payment deadline. This not only shows a sign of respect to your customer, but it also informs and gives them time to prepare for their payment and avoid cash flow issues on your end.
It is also a must that you impose penalties on late payments, and reward timely payers by means of discount vouchers or rebates.
Meanwhile, when following up with clients who are delayed with their payments, it is best to begin with a polite but assertive reminder through email that they are due. You may also make calls in case they do not respond, but make sure that you talk to the assigned person responsible for your business engagement.
2. Ask suppliers to increase duration of payment terms.
Another way to improve your business cash flow is by asking suppliers to increase the duration of payment terms. This works most effectively when you usually receive your client payments late, as this allows you to look for ways to pay them especially when income is tight.
You may want to ask your suppliers to give you at least two weeks to a month to settle your payments. Some suppliers even allow up to sixty days for their customers to pay up, depending on their credit standing and business relationship. It would be easier for you to come up with longer payment terms with your suppliers if you have been working together for a long time already, and if you have since established yourself as a reputable customer.
Once you have come up with increased duration of payment terms with your suppliers, it is a must that you plot your payment deadlines accordingly, alongside the schedules of your client payments. This way you can easily track the most ideal days to make payments to suppliers without getting tight on your funds.
3. Set up a good cash flow system.
The previous points both lead to stressing the need to plot when payments are received from clients and payments to be made to suppliers. In essence, in order to improve your business cash flow, it is a must that you set up a cash flow system.
When setting up a cash flow system, you should take into consideration not only the schedules in which your clients are going to pay up, but also the days in which you have to make payments to your suppliers. You may also want to plot payments that are recurring and those that require installments to complete. This way, you know when to pay outstanding balances and when you are bound to receive payments from those who owe you money.
Having a good cash flow system helps a lot in predicting when you are going to be tight in your finances. It also prepares you in facing instances wherein you have to shell out money, such as a new investment or an unexpected payment due.
Implementing a clear and comprehensive payment policy framework is also important in maintaining cash flow. You may want to work out a payment schedule with your client especially when they intend to pay on a staggered or installment basis.
When doing a payment plan, it is a must that you set deadlines for periodic and final payments, so your client knows when they are due. It is also best to put this agreement in writing.
When working with first time clients, and when you are sure that you can deliver their order on a timely manner, then it is ideal to require full upfront payment. This is to establish a good business relationship and to show that both parties are able to do their share in the engagement.
If an upfront payment is not an option, then you may at least require a security deposit from your customer which can be paid in installments throughout the course of the engagement. You should understand that there are times when you may lose clients who are not comfortable with upfront payment, but it’s way better to avoid such engagements from the start rather than end up wasting more money just because they happen to be delinquent payers.
Improving your business cash flow provides you with a lot of benefits, and these go beyond stabilising wellbeing of your company. A good cash flow allows you to think not just about the present, but more importantly of the future. You can then think of ways on how to grow your business confidently because you foresee the most ideal time to make new investments, and as well protect yourself from being financial vulnerability during times when funds are tight.