Maintaining a healthy level of cashflow is one of the perennial problems US small business owners and entrepreneurs face. It is true that companies can be built on the smallest amount of money and to launch a startup, one can acquire investors or do a crowdfunding campaign. However, once the business is up and running, many expenses come into play and it’s very troubling for businesspeople. In fact, recent research from Barclaycard found that concerns about levels of cash-flow keep an astonishing 63 percent of small businesses owners awake at night, with a third of those admitting that growth plans have had to be put on hold due to a lack of working capital.
That gives you some idea of the scale of a problem which is often compounded by a culture of late payments, particularly from large organisations to their smaller suppliers. So what can business owners do to ease the constant strain and put a little more cash into their coffers? Let’s take a look…
Encourage Prompt Payment
Every business has a few precious customers who pay their invoices on receipt, but for every prompt payer, there are also those customers who continually drag their feet. Turning a later payer into a prompt payer is not an easy thing to do, but with the right incentives, it is possible.
No number of payment reminders or late payment warnings will convert a late payer. Instead, you have to appeal to the very thing that makes them a tardy payer in the first place, which is their reluctance to let go of their money.
If you’re happy to substitute a couple of percent of profit margin in return cash in the bank then early payment discounts can work well. It’s actually quite common for 2 percent discounts to be offered on the total invoice value if it is paid within 10 days, rather than the usual 30, 60 or even 90. This method is also likely to be cheaper than using alternative funding streams like invoice finance.
As well as encouraging early payments, some small businesses also actively discourage late payers by charging penalties or interest on payments made after the due date. Although this could potentially risk damaging important relationships you have, most businesses will agree to these terms if they are explained before any transactions take place.
Create a Cashflow Forecast
With so much to do to keep your small business on track, creating a cashflow forecast might not be at the top of many entrepreneurs’ to-do lists, but if you regularly experience a cash shortfall then perhaps it’s time it was.
A cash-flow forecast is a simple plan that shows how much money the business expects to receive in and pay out over a given period of time, the result of which will be a projection of the amount of cash you’ll have in the bank at the end of every month. This will show you when you can expect a cash deficit and when there’s likely to be a surplus.
As well as giving you plenty of warning when additional cash will be needed and allowing you to plan for that in advance, a cashflow forecast will also provide valuable insight into where money is being spent. It can also be an important resource when it comes to decision making, helping you choose when to invest in new staff and take on new orders.
Don’t Try to Grow Too Quickly
Rapid growth is the aim of most small business owners, but perversely, too much success too early on could put the future of the business at risk. The danger is that when you’re closing more deals every week, you’re simply growing your debtor book rather than your bank account.
If your expenses are increasing every month to pay for the staff and equipment to fulfil more orders, you need to make sure your income increases at the same rate. If the new sales are made on payment terms of 30 or 60 days then you could run out of cash and struggle to pay your own creditors, staff and running costs while you wait for customer payments to be made.
Have a Potential Credit Cource on Standby
If your business is growing rapidly and you’re concerned about having enough cash in the bank to pay your overheads, or you’re going through a lean month in terms of customer payments, make sure you have a potential line of credit you can access.
The right source of short-term finance depends on your business type and the cost of the available credit types. Credit cards, overdrafts, short-term loans and invoice finance could all give you quick access to the funds you need to pay bills, pay creditors and keep your business trading as normal.
Staying on good terms with existing lenders and keeping them informed of any changes in your circumstances will help to keep them onside. This could mean they’re more likely to react favourably if you need financial assistance in the future.
Reduce Your Costs
Taking steps to cut your costs might sound like an overly simplistic way to free up extra cash, but it can help you make significant savings. However, it’s important not to cut big-dollar expenses which affect your ability to generate revenue.
Instead, you should look to ‘trim the fat’ off your business by getting rid of those non-essential expenses you can live without. For example, do you really need to hire external meeting rooms when you can make do in your office? Equally, could you renegotiate contracts you have with existing vendors that will not want you to go elsewhere? Even making sure you’re on the best utility tariffs and broadband deals will help to improve your cashflow position on a monthly basis.
