Being profitable is what all businesses aim for. However, ensuring you have a steady cash flow is even more important.
In this blog post we’ll look at ways to improve cash flow and what can drain it. But first, what is good cashflow?
Good cash flow is having enough cash and credit to pay all liabilities as well as having money left over to help grow your business.
Cash flow drains
Before we look at how to improve, let’s firstly look at some ways where cash flow can be eaten up.
- Customers who owe you money. Otherwise known as debtors. It’s common to give credit in business. However, you are effectively an interest free credit card. You may have to pay suppliers up front, or wages and other materials a month or two before you are paid.
- If your pricing isn’t right, this can cause cash flow deficiencies when you try to grow with staff and premises. Whilst having cheaper prices when starting up can help to win customer initially, you need to ensure a good pricing strategy is in place for when prices need to rise.
- Overspending on items that aren’t yet needed is one thing we see happen a lot. If it’s not going to make you money straight away, do you need to buy it yet? If it’s a nice to have, make sure you have the cash flow in place to ensure your business won’t be put in jeopardy in the future.
6 ways to improve cashflow
- Having a good money collection policy in place will help ensure you get paid on time. A simple procedure such as emailing the invoice when created, then following up with a phone call and letter is a good start. You can use automated tools such as invoices emailed / texted when issued. Also having a follow up process for overdue accounts is essential. If you want any letter templates or ideas on what to use, contact us! A direct debit system could be used for service industry businesses too.
You can also limit credit in certain situations or ask for payment up front.
- Cash flow forecasts can be essential, and something we’ve recently been working with customers to develop. There are fancy tools for this, but we find a simple spreadsheet works fine in most cases. The focus of this is entering the dates when you’re expecting to receive money and pay bills. Once you know this you can see the gaps and put in place remedies to solve.
- Once you build good credit you can use creditor payment terms to extend cash flow. Make sure you keep up with payments, however, as you don’t want to be receiving a similar letter to the one you’re sending out yourself.
- Using a business credit card can have a similar effect. Timing the purchase means you can have up to 56 days of free cash flow before you need to pay it back. Often with little or no interest. These can be a good idea for builders who are making large payments for materials but receiving money in stage payments.
- Investing in your business can help to improve cash flow. If you buy some equipment or training which saves your staff time or product cost, this can help to pay for itself straight away by increasing revenue or cutting costs.
- Build a contingency fund. We aim to be 3 months in front with debtors and cash. This ensures, normally, we have a steady flow of cash into the business to pay wages and rent.
As you can see, there’s a lot of ways to improve cash flow. If you want more guidance with your contact us today and see how we can help you!