Improving business cash flow
Cash flow is important
When business is going well, focus will inevitably fall on revenue and profits, and a business’s cash flow can sometimes get a little forgotten about. It’s easy to fall into the trap of thinking things are going too well, but trouble with cash flow can affect businesses of any size. A case in point is the recent collapse of global retail chain Toys’R’Us.
Rapid growth can be great for business, and we have a few tips to help manage your cash flow to make the most of any new opportunities.
Put together a cash flow forecast
Step 1 is to put together a cash flow forecast. If you’ve never done one of these before, that’s okay. They’re a pretty straight-forward tool to use, and there are a number of good templates around. I would recommend the version available free to download from the Business Victoria website here. When getting started, here’s some things to keep in mind:
- Be as honest as possible with your forecasts. This is a tool designed to help your business, and it only works if you let it.
- Measure your accuracy. See how your projections compared to the actual numbers you achieve. This is a great way to see whether your projections are accurate, and if you need to adjust them in future.
- If possible, look to automate the reporting process by implementing accounting software that can automatically input your cash-flow forecast values, like Quickbooks, Xero or MYOB.
Communicate with your customers
After doing your cash flow forecast, you’ll have a better idea of how cash flows through your business, and this is when you can start to make some changes for the better.
Clearly setting out with new clients both their payment terms and the consequences of not adhering to them is paramount to developing a good, long-term financial relationship.
There is no harm in sending a friendly reminder to clients in the week an invoice is due, and it’s important to ensure you keep on top of any overdue payments with regular email reminders and possibly phone calls.
You can be sure that if you let a debtor slide with no consequences that this will become their new standard of behaviour, and so it is important to enforce any restrictions you’ve set in place.
Check out new customers
Before extending credit terms to a customer do some basic due diligence to gauge the potential risk. At Timelio, we have an extensive due diligence process we conduct on all of our clients and the debtors they want to fund. While your processes may not need to be as in depth as ours, a simple credit check now could save you a lot of headache later on. If a company has a history as a bad debtor, there’s no reason to think they’re going to change for you.
Manage larger clients or customers
Big clients can sometimes seem like a double-edged sword. On the one hand, their business can be a huge step forward for SME’s, but payment is often on their terms with business owners afraid to speak out for fear of losing a key client.
Managing larger clients requires constant monitoring of their payment rates, and quick action if you detect any patterns in late payments. If these debts start to become unmanageable, big clients need to know you’ll take action.
Consider insuring your debtor payments. This is a good option if your ability to continue as a going concern relies heavily on a smaller number of larger clients and could be what saves your business if one of your debtors goes under.
Get funding where necessary
All businesses struggle with cash flow at some stage and getting funding to cover gaps doesn’t mean that your business is failing. Invoice finance can be a great option for businesses with large clients, and it has a number of benefits. If you want to know more about it, you can find a detailed blog of how it works and why it’s a good alternative here.
Alternatively, if you’ve been invited to join a company’s supply chain finance program (or early payments program), this is also a great option for getting the most from your cash flow. Bear in mind one of your larger debtors will need to have set up one of the programs and invited you to join, but if they have, there are a whole host of reasons for you to take up the offer.
Effectively managing your cash flow will ensure that you minimise or avoid growing pains in your business by highlighting when you’ll need an increase in cash flow before you need it.
If you’re a business that needs funding to grow, invoice finance can be a great solution, and you can get in touch with Growth Manager David Webster (firstname.lastname@example.org or 0490 228 953) to discuss your needs.