When you run a small business, you need to know where your money is at all times, not least when times are tough and credit dries up. Here are eight simple lessons to increase cashflow in your business.
If the economy is affecting your business, it’s likely that many of your customers, suppliers and competitors are in a similar position. So what are the sources of cash you can access to help you survive tough times?
Surprisingly the number one source of cash is inside your business.
Most businesses have far more cash tied up in their business than they realise, in funding debtors, in work-in-progress and in inventory.
But do you know how much you can access, or where to look? Follow these eight simple lessons to increasecashflow in your business.
Lesson 1: Don’t strive to grow sales
It’s tempting to think that if you could just sell more you’d have more money in the bank, but until you collect payment this is just one more drain on your cash. So yes, keep selling, but don’t aim to improve your cash balance through sales volume.
Lesson 2: Review your pricing
Most businesses – especially small businesses – can improve their cash balance by increasing their sales price. Whilst this isn’t always the case, you should at the very least be reviewing your prices once a year.
Lesson 3: Take control of your debtors
Invoice promptly and clearly, make it easy for customers to pay their invoices, and follow up on invoices before they fall due.
If you employ sales reps, measure and pay their commissions on sales only after the payments for those sales have been collected.
Want more articles like this? Check out the financial management section.
Lesson 4: Minimise work in progress
The number of days credit you give your customers only starts from the day you raise your invoice. Don’t delay. Get on to it as soon as the work is completed.
On larger jobs, it’s worthwhile requesting progress payments, for example invoicing at agreed milestones.
Lesson 5: Don’t buy for profit
If you’re finding the economy tough it’s a pretty fair assumption that others are too – including your suppliers. Just like you, they’ll be doing whatever they can to sell more, and that includes offering volume discounts. When a supplier offers you a bigger discount for a larger order consider how much cash that order will tie up.
Lesson 6: Review your stock levels
Do you know how much stock you have on hand, and how quickly it’s selling? You can’t work off the averages; you need to review it line by line.
If you have slow moving stock think about ways you can reduce your holding of these items.
It’s critical that you take control of your ordering to avoid this scenario occurring again in the future.
Lesson 7: Lower the quality of your offering
Are you offering your clients too much quality? If your customer doesn’t recognise the quality in your product or service, you’re giving them more than they’re paying for. This is a particular trap for consultants and professionals who take pride in doing the best possible job, even when the client wants something really simple.
If you build the highest level of quality into your product or service but your clients don’t value the extra work this requires you’ll find it very difficult to pass on the additional cost.
Lesson 8: Take advantage of credit terms
Pay invoices when they fall due, but not before. The only exception is if you’re offered a settlement discount. If you have the cash available these are often worth taking advantage of.
How many of these lessons can you apply to your business to increase cashflow? What has the effect on your cash flow been?