How to improve your business’ cash flow
Having cash flow issues? Make sure you are following all the best practices to keep your company's finances healthy and balanced.
Even if your business is profitable and overall healthy, you may find yourself struggling during certain times of the year, especially if your activity is seasonal.
The obvious response is trying to cut on costs, improve efficiency, widen your customer base, diversify your business.
But there may be easier solutions: cash flow issues can often be solved or at least mitigated by improving your business practices. We’ve put together some tips that can help.
What's in this guide?
- Carry out a cash flow analysis
- Improve your admin
- Align payables and receivables
- Encourage early payments
- Chase late payments
- Run checks on new customers
- Ask for a deposit
- Consider leasing rather than buying
- Break down orders to suppliers
- Consider a business credit card
- The bottom line
- Frequently asked questions
Carry out a cash flow analysis
Knowledge is power. To figure out how to solve the problem, you need to know exactly where it comes from: what’s wrong with your cash flow? When are issues more likely to come up?
Remember to include all your cash sources in the analysis, as well as all your costs and expenses. Always keep an eye on your cash flow forecasts and be ready to act quickly if an unforeseen event suddenly complicates things.
Improve your admin
Make sure that all the basics are covered. For example, are you sending out invoices as soon as possible? Are they clear and complete?
Plus: are you sending them to the right person? If a client has a query about an invoice, can they easily find someone to speak to in order to sort things out?
Align payables and receivables
Sometimes shuffling around payables and receivables a bit can help. For example, if you need to do a big order of stock, you can try and plan it right after an equally big invoice payment from a client is due; avoid doing the other way around.
Also, compare your invoice payment times: if you are paying suppliers within 30 days, but giving clients 60 or 90 days to pay their invoices, your cash flow will hardly be happy. If your suppliers ask you to pay quickly, so should you to your clients.
Encourage early payments
If negotiating shorter invoice timeframes with clients turns out harder than expected, consider offering a small discount for early payments instead. People don’t like paying early but they also do love saving money.
Of course, you’ll make slightly less; but after all, cash flow issues can cause much bigger and more expensive troubles.
Chase late payments
Make sure you have a proper procedure in place to chase late payments quickly and efficiently. All businesses have their own cash flow to think about, so it’s only natural that they will try and postpone payments when they can.
Consider including late payment penalties in your contracts, and do enforce them, especially if clients are late more than once.
Even if you are new to the game, be polite and understanding but firm. Other businesspeople will respect you for it.
Run checks on new customers
You can run credit checks or ask for business references to clients you have never worked with before.
This can be especially useful at the beginning, when you are still trying to build up your customer base and don’t know who you can trust. It can sound like a hassle but might save you a lot of trouble afterwards.
Ask for a deposit
This is especially for big orders, or if you need to purchase extra equipment or raw materials to carry out a client’s request.
It will help you protect your business if the client cancels last minute or there are issue with their payments.
Consider leasing rather than buying
Buying equipment for your company can often be a great investment in the long-term, but it risks wreaking havoc on your cash flow, especially at the beginning.
So, see if you can lease it instead; or if you do buy it, ask if you can pay in instalments.
You might think it’s the wrong solution because it may be more expensive. But you can also consider it an investment towards the short-term sustainability of your company.
Break down orders to suppliers
Buying in bulk can be great: you are often able to secure lower prices and have abundant stock to deal with unexpected circumstances or client requests.
But have you considered what it does to your cash flow? Again, sorting out cash flow difficulties can be expensive, so it may be worth paying a bit more to break down your orders to suppliers in smaller chunks.
Consider a business credit card
But they all come at a cost. Instead, the first option you should consider is a business credit card. As long as you always pay your bill on time, a business credit card can buy you time to improve your cash flow management every month, at no cost. You might even be able to earn rewards on your expenses.
We’ve put together a dedicated guide on how to use a business credit card to improve your cash flow.
The bottom line
It’s hard to solve big, fundamental cash flow issues without making significant cost cuts, finding new clients or rethinking your business model.
But it’s also true that being smart and organised about it can go a long way towards mitigating the problem. Before panicking and changing your whole business plan, it’s worth considering less dramatic solutions.
Be especially careful before responding to cash flow problems with borrowing, which is often costly and can also impact your business credit score.
Frequently asked questions
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