Maintaining consistent cash flow is a never-ending issue for many businesses, especially smaller ones. Cash ebbs and flows in accordance with how busy you are – or at least, how busy you were a couple of months ago! During busy periods, your cash flow will be better, with plenty of money coming in to meet expenses and maybe even enough extra income that you may consider investing in new equipment or expanding your company. However, in those inevitable dry periods that sometimes affect service-oriented businesses, the cash flow may taper off and you could end up wondering how you’re going to meet payroll, pay the rent, or keep the lights on. So, act now and build a plan. A cash flow management plan will help any company meet its financial obligations even in tough times. Effective cash flow management techniques will reassure you that your company will be able to get through a temporary rough patch in business operations and income. Here are five very useful ways to reduce sporadic cash flow and keep your company operating with the least possible amount of worry.
- Devise a Workable Cashflow Plan
- You, your managers, and your accountant know how much money it takes to keep your business functional. Using this data and the professional knowledge of your staff and advisors, devise a cash flow plan that can keep your business functioning even in lean times. Don’t just say “I need enough money to cover my bills.” Be more specific and set an exact amount of income for a specific period. This will give you a measurable goal to work toward and allows you to see immediately when you are falling short or exceeding your expectations. Give that goal some profile and let your team own the result!
- It all start with sales
- Well, it starts with leads actually. But if you do things right, those leads will turn into sales. So, to the state the obvious, if you want more cash you need more sales! If that seems overwhelming then it might help to know that there are just 3 ways to get more sales: Get more customers; sell more to your customers; or increase your prices.
Here are some of the things you can do:
- Increase advertising and marketing: Choose to see marketing as an investment. Expand your advertising and marketing program so that you can reach more potential customers and sell more to your existing customers. This will require the investment of time, money, and resources, so plan carefully, especially when you are facing a cash crunch.
- Ask existing clients for referrals: Your existing clients are most likely happy with your products or services. Ask them if any of their colleagues, friends, or family members could also benefit from using what your business has to offer. Consider providing an incentive or reward, such as an experience that they will remember, for clients who provide valuable referrals.
- Cross-sell or upsell: Engage your customers and see if they could benefit from other products or services you offer. Devise a way to sell your current clients more of what you offer. For example, you could create a bundled service package that is better value but sells for a higher overall price.
- Tighten up your processes
- Many businesses that report cash flow pain could actually do much better if they were more focussed on the things that drive that cash.
Here are some of the things you could do:
- Change your payment terms – it might be possible to reduce the number of days credit you give. Find out what your peers are doing and don’t be afraid to reduce terms to at least match the market.
- Consider whether you could realistically collect some cash up-front for the work you do.
- Make sure that you invoice for work as early as you practically can – this could include progress payments or just getting those invoices out as soon after completion as possible.
- Make sure you send statements on a regular basis – we know people that never pay an invoice unless and until you follow them up! They reason that if you don’t ask for it, you must not need it.
- Change your statement to read simply ‘Due’ and ‘Overdue’. Breaking amounts into 30 days, 60 days, 90 days only tells them that they are not in the worst category yet and they can probably fly under the radar for a while yet.
- Reserve the right to charge interest on overdue amounts. If it costs more to put you to the back of the queue, you might be closer to the front next time.
- Send them off to debt collection. This is always a judgement call based on your sense of the costs and benefits of doing so.
- Break the nexus between ‘doing’ and ‘collecting’
This might be easier to do than you first think. Consider for a moment how many things you pay-by-the-month – insurance, power, probably a few others. The point being, this is becoming the accepted way to pay for things and it’s a great way to even out your cash flows. Could you possibly do this in your business? It’s worth thinking about.
- Use the good times to plan for the not so good
- When things are going well, it’s time to put away a little cash for safety. A safe level of cash will vary from business to business but should give you enough breathing space to ride out a difficult period and turn things around. Somewhere between two to three months’ fixed costs is likely to be comfortable.
- Likewise, when things are going well, it’s time to talk to the bank. Put in place an approved finance facility, such as an overdraft that can be called upon when needed. Ironically, you are far more likely to get approval for the facility when you don’t need it than when you do.
For assistance in improving your cash flow, contact BridgePoint Group on 1300 656 141.