October 28, 2014
The number one concern of every small business is, ‘how do I increase cash flow?’ Without it, employees and bills can’t be paid on time and even one month of cash flow issues can set off a chain reaction that might negatively impact a business’ credit rating and future lending options.
Unfortunately, there’s no magic bullet when it comes to healthy cash flow. Instead, businesses need to put both short and long-term policies in place in order to stabilise profitability and future growth.
These policies can include:
1. Renegotiating with suppliers
Start by renegotiating better prices with each supplier in exchange for paying cash-on-delivery. This provides two advantages:
- A saving on the company’s cost of goods
- Fewer end-of-the-month financial concerns
If you can prevent bills from piling up waiting to be paid when customers pay you, the healthy cash flow cycle will begin.
2. Customer review
There’s no such thing as a good client who has bad credit. In other words, it doesn’t matter if the client is loyal or buys frequently if they’re not paying the bill on time. Determine who those clients are and then have accounting contact each to notify them their credit has been frozen and to discuss a payment schedule. When explained diplomatically, these customers will understand that payment delinquencies are having a negative effect on your business.
3. Invoice policies
If your current invoicing policy allows customers to pay within 15-30 days after they’ve received the invoice, that means your company is out-of-pocket close to 60 days after the purchase. This can no longer be an acceptable policy, as it impedes cash flow unnecessarily. Payment details should be changed to state that payment is due when the invoice is received. Good customers will not mind the adjustment
4. The 20/80 rule
Did you ever stop to notice that about 20% of your customers make up approximately 80% of your company’s revenue? The numbers may differ slightly by industry, but it is something to note. Providing incentives to these top customers for early and electronic payments can make them even more loyal. Incentives might be in the form of extra rewards club points, a financial discount on the invoice or inclusion into a newly-created VIP club.
5. Payment Options
Large ticket items can be billed in two to four instalments, depending on the amount and the projected duration of the job. Requiring the first instalment upfront is standard practice in most industries, and respectful clients will understand.
In summary, cash flow can be increased almost immediately by making any or all of the above changes. Your company is not a bank, nor are you in the debt collection business. Daily efforts should be focused on the company’s mission of making or selling great products or services. Put strong cash flow policies into effect, and it will never again become a concern.
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