Finding ways to improve your business’ cash flow can be stressful. Maintaining a steady inflow of cash is necessary to sustain a business and put it in a position to successfully thrive and grow. However, running a business is expensive and it can be tricky to find a balance between making money and spending it. This can make it feel like you are always treading water trying to keep up with expenses leaving no room for growth. Improving cash flow and increasing the spread between income and expenditure can help build up a cash cushion and put you in a position to implement long-term sustained growth for your business.
To monitor your cash flow, it is important to develop good bookkeeping practices so that you stay on top of your business’ financial data.
We’ve put together some tips to help improve your business cash flow:
Create a Cash Flow Forecast
Use your records and industry research to highlight the cycles in your business and create a forecast of future cash flow. Sketch out necessary payments over the year ahead against predicted income to estimate how much money you will have at a given time. Predicting possible cash flow on a monthly and yearly basis allows for intelligent planning. Creating a forecast also makes it easier to make major purchases or investments without negatively affecting your business.
Set up a Payment Policy
Instituting and enforcing a payment policy will help increase cash flow. Create a policy with short payment terms to ensure timely payment. If possible, offer small discounts for on-time payments, and penalties or interest on overdue invoices. Make sure customers are aware of your payment policy and send out invoices as soon as possible. Make it as easy as possible for customers to pay their invoice by providing multiple payment options.
Chase up Outstanding Payments
Pursuing unpaid invoices is essential for maintaining healthy cash flow. If you don’t already have a process in place for regularly following up on overdue payments, you should create one. Online accounting software (e.g. Xero) have features which can automate invoice reminders. If necessary, outsource the issue to a debt collection agency. Having a method for dealing with customer disputes quickly and effectively is essential to prevent payment delays.
Negotiate Better Terms with Suppliers
It’s a good idea to spend some time researching your industry and seeing what would be helpful for your business (e.g. instead of cash on delivery, you could ask for 14 days credit). In terms of which suppliers to target, start negotiations with your regular suppliers who you have established a good rapport and history with. Next, you may want to consider those that are proportionate in size to your business – suppliers that are able to provide better terms without your request negatively impacting their business and therefore risking your relationship.
Review your Costs
It sounds fundamental but sitting down with your books and thoroughly examining where your money is going is extremely important. Eliminate unnecessary outlays but be careful that you don’t trim costs which will negatively affect the customer journey or your investment in staff. Take some time to negotiate the best possible deals for regular expenses such as insurance, phone and technology services, power, and water. Whilst reducing costs will assist with cash flow, this shouldn’t be at the expense of investing in your business’ future.
Keep on Top of Inventory
Regularly review inventory with a focus on the costs and benefits of keeping items in stock. If the cost is greater than the benefit, replace it with a more profitable item. It is also important to closely monitor stock levels and have a process in place to recognise when new stock is necessary. Finding suppliers who will provide inventory only when necessary can cut back on storage costs and prevent you from spending money before you need to. It also helps to ensure your funds are not all tied up in obsolete stock – it is better to sacrifice the discount for bulk purchases in order to regain some cash flow.
For some businesses, it can be more profitable to lease rather than own items such as vehicles or machinery. This also reduces large single outlays of money in exchange for smaller regular payments which can help you maintain smoother cash flow.
If you’ve achieved a healthy cash flow that covers all your regular expenses with some wiggle room for emergencies, find a productive way to use your excess funds to grow your business. Even shifting your money to a higher interest account can provide returns with minimal risk.
Arabon provides a range of business and accounting services for businesses of all sizes. Let us help you take some of the stress out of handling your finances by finding the right support options for your business. If you want to know more about improving your business’ cash flow and get some help coming up with a tailored plan, call us today on 1300 ARABON or visit our website for more information.