All companies go through periods of ebb and flow in finances, but in a small company, a cash flow problem can be devastating. Here are some ways to minimize cash flow issues and create a more stable environment for growth in your company.
Make Some Business Changes
While focusing on your finances, consider examining some of your business practices. How effective is your marketing? Are your marketing dollars being spent where you’re most likely to find good clients? Spend less to find more good clients.
Upselling, expanding your offerings, and getting referrals are ways to increase sales without increasing marketing costs. Survey your good clients to see what other needs they have that you might be able to fill. Consider an incentive for referrals. Many companies offer monthly fixed-rate service arrangements, which can give you guaranteed monthly income to pay your bills.
Use cash flow reports to help you predict cash flow problems and make good business decisions. The Cash Flow Statement tells you where you are currently, while the Cash Flow Forecast can tell you what to expect in the future, based on current accounts receivable (A/R) and the past payment behaviors of your customers.
When growing, weigh the increased potential income against increased expenses to meet that growth. Using cash flow reports, set up business procedures and terms with clients that will ensure that you’ll see the benefits of that growth without creating a cash crunch.
Control Incoming Cash
It’s important to maintain a financial cushion to cover your business expenses during leaner times. This can be in the form of savings or a business line of credit. Also be sure your bank offers help during short term cash flow difficulties, such as overdraft protection.
For improving customer payment, consider these invoicing tips:
- Invoice promptly when work is completed – don’t wait until the end of the month.
- Make sure your invoice has all the necessary information the customer will need for easy processing, and that it’s very clearly laid out.
- Create a relationship with your customers’ accounts payable (A/P) staff. Send the invoice directly to the correct department addressed to the person who pays the bills.
- Offer incentives for faster payment (i.e., 2% discount for payment within 10 days) and penalties for late payment.
- Accept payments the way the customer prefers to pay (credit/debit, direct deposit, Paypal, payment apps, etc.) to make it quick and easy for the customer to pay.
- For extended projects or large purchases, charge a deposit payment and interim payments as the work is being done, so you’re receiving income to pay the expenses associated with completing the work.
- Use an invoicing tool that alerts you before invoices become outstanding so you can easily send reminders.
Another useful service is invoice factoring – selling your A/R to a third party at a small discount to receive an immediate cash infusion. The third party then handles all the collection while you have cash with which to grow.
Control Outgoing Cash
Besides creating reliable incoming cash flow, you should also watch your distributions:
- Evaluate ways to cut costs, especially recurring costs, and avoid waste.
- Sell extra inventory and assets you’re not using.
- Lease equipment rather than buy it.
- Pay your own A/P on time, but not earlier than necessary.
Applying these suggestions on an ongoing basis can be challenging, but they will help improve your cash flow and set you up for further growth. Have a person dedicated to watching your cash flow so you will always stay on top of it. Contact us to see how we can help you.