Indeed, while long-term business failure results from an inability to make profits, short-term business failure happens when a startup or small business doesn’t have enough cash to pay its bills. A whopping 82% of startups and small businesses fail for this reason.
The basics of prudent cash flow management are rather obvious. Money inflow must exceed money outflow. On the other hand, imprudent cash flow management practices like overstocking, offering lengthy payment terms, overspending and overtrading clearly put your business in jeopardy.
Money inflow must be prompt and timely to facilitate new stock acquisition and payment of suppliers. When cash is easily accessible you can considerably tilt buying and negotiating terms in your favor; this will no doubt help to boost profitability in the long-term.
Good cash flow management will also enable you to better anticipate shortfalls in money inflow thus allowing you to initiate timely contingency measures e.g. securing favorable credit terms and negotiating better payment terms.
What therefore are some of the prudent cash flow management practices that you as a small business owner should implement?
1. Reviewing your cashflow systems
Begin by going through your cashflow system in order to identify possible loopholes through which the business may be losing money. Accordingly, put in place measures that will ensure customers are always invoiced for products/services sold and promptly so. Now your system should at a glance show what is owed to you by clients and what you owe your suppliers.
You should also be able to quickly ascertain that you are only paying for supplies received; failure to do this may result in some of your suppliers routinely overcharging you and/or billing you for supplies not received.
It is also worth working out a payment structure that will see you make payments to different suppliers on different dates over a suitable time period instead of paying all of them at once.
Basically, it’s all about making the most of each dollar in your possession, for as long as you can, before it has to be spent.
2. Creating sales projections
Making sales forecasts and monitoring daily sales will help you to almost accurately estimate your inventory requirements. You will thus be able to make well-informed purchases and thereby avert the possibility of overstocking inventory for which you will incur storage and maintenance costs.
Additionally, referring to past quarterly sales and future estimates will help you to sensibly budget and plan for inventory purchases.
3. Insisting on advance payments for large orders
Upon receiving a large order or an order for a custom-made i.e. bespoke item it is prudent to insist on an advance payment that is equal to or more than half the total price of the order.
A distinct characteristic of bespoke products is that they have a limited sales value, typically to the person making the order. In the event that the product is no longer considered as valuable to the client as before, you become subject to the risk of receiving a lesser payment than was initially agreed upon.
Insisting on an advance payment will therefore go a long way in helping to reduce your financial loss should things go awry.
When you are the one making orders, however, try and avoid paying deposits. This especially applies when you are dealing with suppliers well known to you. Simply ensure that your credit history and relationship with a supplier remains positive over the long-term and this will spare you the need to make deposits. This cash can serve better purposes elsewhere.
4. Designing beneficial terms of payments for large orders
Sometimes it may be impossible to demand for upfront payments e.g. if the client firm has limited financial muscle or has a policy against making initial deposits for orders. A proactive business owner will in such a case come up with a negotiable payment plan based on tangible benchmarks.
Not only should such a plan be agreeable to both parties, the sum of payments made should ideally suffice and preferably exceed the costs incurred in delivering the order.
For example, given an order to screen-print 1000 t-shirts, the printer may require the client to make a 15% payment after the t-shirts have been purchased, another 35% after the screen has been designed and inks purchased, and 40% of the total agreed amount be paid in four installments as batches of 250 t-shirts each are delivered. Only after all the 1000 t-shirts have been delivered and inspected for quality will the remaining 10% be paid.
5. Offering discounts to encourage quick payment
To accelerate cash inflows it might be a good thing to offer early payment discounts to clients who will remit payments well before normal payment term periods elapse.
Typically, invoices are meant to be settled 30 days after receipt, but if payment is made within the first 10 days a 2% discount is given.
Knowing your clients payment habits and your business’ requirements you can make a decision to make this discount rate more attractive for clients who are habitually late.
Such an approach won’t work across the board though. It might work when you are trying to secure more business from a promising startup but you certainly mustn’t apply it for a big client who gives you big business every month but always pays up after 40 days.
6. Enforcing credit terms
Your cashflow will suffer when you extend credit to slow-paying customers. Having identified such clients you need to negotiate new terms that will compel them to settle their accounts quicker.
New clients must know that your business is very particular about prompt payments. Prior to doing business with new clients it is prudent to check their credit reports.
7. Harnessing cashflow management technology
8. Making the means to get paid more convenient
As a small business owner you need to make it easy for your clients to make payments.
You can, for example, invest in technology from Tradeshift or Basware to allow your clients to pay invoices via the Cloud. This will not only hasten cash inflows but will also help to avoid the errors and delays characteristic of the paper invoice trail.
Yet another option courtesy of Zapper Scan-to-Pay is to issue clients with invoices that feature QR codes. Using a smartphone a client simply needs to scan the code, confirm the amount, and make payment, all within a couple of seconds.
9. Ditch pitching in favor of attracting new customers gradually
Sourcing for new business opportunities via pitching has been shown to be counterproductive seeing as time and resources are expended on an exercise that may not yield any business.
Today, many small business owners are attracting new clients by gradually growing relationships with them. Beginning with informal interactions and conversations, such a relationship grows from strength to strength as required. With several such relationships it is almost certain that new business will continually become available moving forward.
I sometimes think that this approach is akin to organic SEO where visitors tend to prefer/trust naturally-ranked (gradual relationships) websites more as compared to paid results (pitches).
10. Opening a business credit card
Keeping personal funds and business funds separate is a no-brainer; avoid commingling like the plague.
With a business credit card you will easily be able to keep your business and personal credit separate, build the business’ credit, and avoid a scenario where qualification for business credit will need backing from your personal credit.
Keeping these lines of credit distinctly separate is one of the basics you must comply with if you have your sights set on more investment and business growth.
11. Offering fixed rate payment packages to your clients
Periodic payment packages are quite ideal for purposes of ensuring that good cashflow is sustained. This approach can work really well for businesses that have traditionally used the hourly rate as the basis for payment e.g. freelance writer services.
Nevertheless, with the hourly rate there is really no way of estimating what your income will be month to month.
However, developing retainer packages based on a fixed number of hours per month, and having clients pay up in advance, is an effective way to take total control of your finances.
Getting payments in advance means that you can account for your spending and business growth using actual figures rather than estimated ones that may eventually not tally considering that some of the arrears may never be settled.
12. Maintaining and repairing rather than replacing capital equipment
Your business will enjoy better cashflow if crucial equipment is well maintained and expertly repaired when damage occurs instead of being replaced immediately.
As a business owner you should ensure that equipment undergoes regular maintenance in order to detect and/or forestall possible damage and to restore efficiency.
In case some parts need to be replaced opt to source for these from third-party suppliers rather than the original manufacturers because the latter option is certain to be way more expensive. Also, find reputable technicians to handle complex repair/maintenance tasks instead of reverting to the manufacturer.
13. Going for used equipment instead of new equipment
You should strongly consider scouring the marketplace in search of well-maintained used equipment when it becomes necessary to purchase additional or replacement machinery.
Every now and then you will come across ads and auctions notices giving sale details of some equipment you may require. Buying such equipment may see you spend just 50% of a new machine’s price; the used machine’s capability will nevertheless be equal or just slightly less than what you would get from a new machine.
Leasing equipment can also be considered when your business’ cash flow is faltering. Expect to spend more in the long-term though thanks to interest payment.
14. Selling off obsolete/excess equipment or inventory
Excess inventory is always at the risk of becoming worthless or obsolete especially where customers preferences change rapidly and new materials are rapidly adopted.
Inventory that you are unlikely going to use in the forthcoming 12 months may be worth selling off especially if retaining it will be substantially expensive and expected proceeds from the sale minimal.
15. Adopting subscription sales
Subscription programs are best created for businesses whose products are repeatedly repurchased and consumed multiple times a year e.g. magazines and landscaping services.
You might want to think of this approach as a means to boost cashflow considering that customers will be required to prepay for the products and delivery.
This arrangement will allow you to secure future sales and cover the expenses involved.