In the business world, cash is king. You may anticipate large profits in the next six months, but if you don't have enough cash coming in to cover your expenses during that time, you may not get a chance to realise those earnings. That's why it's important for all businesses to develop the right strategies to maintain a healthy cash flow. The following tips can help:
1. Speed up receipt of cash.
Any steps you can take to shorten your receivables will boost your cash flow. For instance, send out invoices immediately after the delivery of goods or services. Another idea is to change your payment terms - for example, from 60 days to 30 days.
Offer a small discount to customers who pay their bills early and charge a penalty to those who pay late. Monitor your receivables on a weekly or bi-weekly basis and follow-up with late payers when appropriate.
Financial tip: Offer credit carefully. Do a financial check on new customers before offering them credit. Also, ask for and check their business references.
2. Use your business credit card.
Consider using your business credit card to pay suppliers and make purchases. Learn about your card's grace period, and take advantage of it - you may have up to 21 days after receiving your statement to make the payment. Some cards also come with cash-back features. Speak to your business banker about the card that's right for you.
3. Analyse your cash flow.
Many businesses go through cyclical highs and lows. Clothing retailers, for example, typically have their best months in December, while schoolbook and uniform suppliers do well at the beginning of a school year.
A cash flow analysis can highlight the cycles in your business. This information can be used in many ways, such as timing your borrowing, arranging the right amount of staffing, and boosting your marketing efforts during lulls.
4. Work with an accountant.
The services of an accountant can serve as an investment rather than an expense. An accountant can review cash flow projections and results, provide insights into areas that you may have overlooked, and help you anticipate and plan for cash flow problems.
5. Get a line of credit.
Having a line of credit in place to cover short-term needs and emergencies is a much more efficient way to manage your cash flow than trying to get a loan in a hurry. Rates are competitive, you can draw from your line of credit when you need it, and you pay interest only on the amount borrowed. Arrange for a line of credit before you fall short.
6. Put your cash to work.
A high-interest Savings Account for business allows you to earn a competitive rate of interest on your cash on hand, but the funds are accessible whenever you need them. You earn interest every day on each dollar saved, and can withdraw the money whenever you need to.
7. Longer-term financing.
Consider taking a loan to purchase a piece of equipment, car, or computer system instead of buying it outright with cash/savings. You'll free up some cash that can be used to tide the business over when cash flow is tight.
8. Consider "continuity" sales.
Another way to improve your cash flow is by offering deals on your products or services to customers who buy for a fixed period of time. A subscription-based product such as a newsletter or magazine is a good example of how continuity sales work: you pay the publisher upfront for a one-year or two-year subscription; in return, you get a better deal on the cost of the newsletter. Continuity sales can be made to work for almost anything. Your customers save money on a package of goods or services, and you get the cash upfront.
9. Invest in your business.
Any steps you can take to build your business, such as training staff or boosting your marketing, can help improve cash flow.
Thinking of extending credit to your customers? It’s important to know how to create a healthy credit policy.