Are you one of the many business owners whose numbers look good yet you never have enough cash to cover your wage, supplier invoices or BAS? Here are some simple ways to improve cash flow.
The truth is, many of us assess our profit using a P&L (profit & loss) report, yet this is not the same as understanding our business’ cash flow.
In its simplest terms, the P&L reflects that the invoice has gone to the client but the payment, the cash, may not yet have been received.
Cash flow, in the meantime, can be used as a measure of your business’ liquidity. This can be extremely useful when an owner wants to sell their business as investors look for liquidity.
Cash flow can be measured historically and as a projection.
As an historic measure it tells the story about how money moves in and out of your business over a period of time.
As a tool to project future needs, cash flow can help you plan to ensure there is sufficient cash coming IN to cover the future projected flows of cash OUT.
Business owners need to track and predict cash flow in order to:
- Always have enough in the bank to cover cash payments.
- Always have enough to cover BAS and tax payments – who wants a 10% interest charge?
- Avoid bank charges for overdraw, or “insufficient funds”.
So those are the reasons good cash flow matters. So what can you do to improve cash flow in your business?
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Here are just seven easy ways to help your business improve cash flow:
1. Ensure your client pays you for the goods before you have to pay your supplier. Implement a policy of up front payment. As soon as your client places their order, invoice them and do not start work on the job until you have received up front payment. You would need to explain this concept to your client in advance, so it is not a surprise – communication is always the key.
2. Ensure that your bank account details are stated clearly on your invoice so that it is easy for your customer to make electronic payment to you … and ensure the details are fully correct. I am astounded how often the bank details are not on the invoice AND how often the details are not even correct.
3. Prolong paying your suppliers and pay to their payment terms, but no earlier.. In addition I would add the importance of treating people as you want to be treated; what goes around comes around.
4. Make sure that you take full advantage of cash discounts from your suppliers.
5. Use Visa and MC to give you longer to pay, but only if the vendor doesn’t charge fees for credit card payments.
6. Send your customer regular statements to show when payments are due. These are a summary and reminder to the customer of what is outstanding and of the payment terms. It is amazing how many SMEs do not send statements.
7. Call the accounts payable department of your customer and ensure that they have your invoice in their system for payment. Sometimes invoices sit on people’s desks, or are lost in the transition from approving person to accounts.
There are just some of the numerous ways you can improve cash flow in your business.