Timing is everything when it comes to cash flow. There are times when all your invoices are paid at once and your cup overfloweth.
Then there are times when all your debtors are behind on their invoices and you’re hit with bills, overheads, staffing costs and it’s time to pay for the next shipment of inventory.
Instead of trying to master time, here are some tips on how you can master cash flow, with first-hand advice from good business owners.
1. Forecasting helps to avoid cash flow storms
The first step in mastering cash flow is forecasting your finances. Forecasting doesn’t need to include complex algorithms. It can be simple and still save you a lot of headaches and cash flow problems. Even if you’ve only been in business a short period of time, you can use that data to forecast the peaks and troughs of incomings, outgoings and potential cash flow bottlenecks.
Once you have been in business for a number of years, your forecasting can be more accurate as you draw from multiple years of peaks and troughs.
2. Separate your accounts and know when to outsource
Being a business owner doesn’t mean you’re a good accountant. In fact, most business owners don’t have a background in finance but find themselves dealing with it as best as they can as a matter of necessity. A good starting point is to keep your finances simple. And the first step should be to separate your personal and business accounts.
A common mistake with new businesses is to keep personal and business finances in the same account. While this is often a result of convenience, it can have a profoundly negative affect on your business finances. To forecast accurately, you need an accurate reading of your business’ comings and goings. If those are confounded by your personal expenses, the forecast can start to look grim.
To make your business finances even simpler, outsource them. If you dread working on your business finances, find help. Not only will it help you to avoid mistakes and shift your financial headache into an informative business tool, it will free up time (and reduce stress) so you can concentrate on other aspects of your business.
3. Stack your payment terms and follow up with a velvet fist
It’s true, you need to spend money to make money. And it may seem obvious, but having working capital can be difficult, especially when you’ve invested so heavily in inventory, staff costs, marketing, overheads, and so much more. Then one day, you notice your working capital has been frozen in by these necessary expenses and late invoices. The opportunities to grow and make money are there, but your business account is bare.
The first step in minimising the impact of invoicing on your cash flow is to ensure your invoicing strategy is set up to work for you. There may be industry standards for payment terms, but you can set your own so they work in your favour. Depending on your industry, you could ask for a larger deposit upfront, 14-day payment terms, or even a discount for early payment – this is a more amicable way of demanding a late payment fee and can be an effective incentive for businesses.
Xero’s guide on invoicing is a handy resource. Their advice is to keep at them. Be polite but firm and continue to follow up invoices. It may seem impolite, but unpaid invoices can be devastating for small businesses. While it’s not always the magic negotiating tool you’d like, staying polite and persistent can help. And staying on top of sending and following up invoices can make a huge difference to cash flow.
A helpful tip is to use your calendar to schedule follow-ups. When you send out an invoice, add an event into your calendar with a note to follow up the invoice if it’s still unpaid by a certain date. And phone calls followed by an email tend to work better than just an email.
4. A business loan can help bridge cash flow challenges
If you forecast your finances, manage your inventory, and keep your cool while you follow up your debtors (again), and you’re still encountering cash flow challenges, a business loan could help. Call your Broker for an obligation free chat, to see if this is your best option.
Some factors affecting your cash flow are out of your control. Sales will fluctuate and business expenses can pop up unexpectedly. But the tips above can help you address some factors that are within your control, and help you improve your cash flow management.