How To Improve Your Small Businessâ€™s Cash Flow
For your small business to succeed you need to manage your cash flow well, that is, you should find ways to make sure that funds come in as soon and as consistently as possible, while also delaying outflow, where reasonable. If you’re planning on starting a small business, or if you have already have one but need guidance on how to improve cash flow, below are some steps you can employ. Check your customer’s credit history You need to investigate a potential client’s credit history before extending credit to them. If you do not do this, you may experience late payments. Worse, they may not be able to pay at all. Both scenarios will create cash flow problems and you may not be able to meet your own financial obligations.
Do cash flow forecasting
Your business will experience fluctuations in cash flow. It will be relatively large in one period, and then dip during certain months. It is important for you to do this, because if you get blindsided by unfavorable cash flow movements, and you are not able to obtain financing, you can go bankrupt. The simplest method to do this is to have a spreadsheet that shows cash coming in from all sources 90 days forward, and your outgoings for the same period.
Evaluate customer and supplier terms
If the gap between your average collection and average payment periods is too wide, for instance if the former is 47 days and the latter is 23 days, you will end up frequently
looking for working capital elsewhere, which can mean additional expenses on your part, especially if you have to take out a loan to bridge the gap. Aim to adjust your terms so you can shorten the receivables-payable gap, so that you will be able to maintain consistent and sufficient cash flow. To know more about
Encourage upfront payments
Avoid chasing invoices and waiting for money to come in by motivating potential consumers to pay upfront. Yes, this will be going against conventional trade credit models, like net 30 and net 60, but this will help you maintain adequate cash flow. To achieve this, incentivize upfront payments through discounts.
Consider working with companies engaged in the factoring business
This involves selling your accounts receivables or invoices to a third party, known as a factoring company, at a discount. By doing so, you get the money now so you can use it as capital, rather than wait for your consumers to settle their debts. It will also free your resources so you can focus on more important aspects of your business. Click here to find a factoring company near you.