How Small Businesses Can Improve Cash Flow with These Simple Steps

How-Small-Businesses-Can-Improve-Cash-Flow-with-These-Simple-Steps

Cash is king when it comes to operating in business and therefore managing cash flow is an essential part of making your business viable for the long-term. It’s near impossible to grow a business without a strong and positive cash flow so as a business what can you do to maintain a health and positive cash flow?

Keep Your Books Organised

Small business owner often find it challenging to keep up with bookkeeping especially as their day-to-day business operations slowly takes up their time. Disorganised bookkeeping can increase the chance that overdue payments will go unnoticed or you’ll fail to identify poor business management practices such as negative net profits.

Often the simplest and cheapest approach to managing your account is by implementing a financial accounting system such as Xero, MYOB and Quicken. By implementing features such as automated bank feeds you’ll be able to quick identify negative cash flow concerns and report on areas such as:

  • Outstanding receivables
  • Cash in / Cash out for the month
  • Aged Payables and creditor reports
  • Net profit
  • Monthly operating expenses.

You can also seek further assistance by outsourcing your accounting to a qualified CPA or accountant.

Check Credit Ratings before the Sale

Research has shown that only 17% of businesses conduct credit checks on new customers. Before you agree to conduct business with a business or individual a credit check can be used to reduce your risk and allow your business to make informed decisions on potential customers’ or vendors.

Credit checks will allow you to make better upfront decisions before any risk has been accepted by your business. Credit checks allow businesses to research customers’ payment habits, access legal records, prequalify new leads and monitor and evaluate new vendors.

Credit checks also allow business to lower the risk of acquiring debt collection and recovery costs in the future.

Ensure Credit Terms align

It’s often seen that small businesses deal with customers and suppliers that have out of sync credit terms. For example a common small business mistake is to provide 60 days to the debtor when your suppliers have requested 30 days.

The easiest way to avoid this is to clearly review your suppliers’ credit terms as part of your supplier on boarding process. By doing this you’ll be able to set your credit terms more easily and understand any difference required in those terms for products and services you offer.

It’s also very important that your business has a terms of trade in place before the transaction begins otherwise you may be operating on your customers terms which is not in your best interest.
If you’re already in the transaction however you might try:

  • Renegotiating terms with your customers and /or suppliers
  • Factoring – Where a financial institution will lend your business short-term cash secured against the value of invoices outstanding
  • Early payment discounts such as payment for invoices that are paid before the due date.

Get some or all of your money up-front

Small businesses often have significant expenses each month such as rent, payment to suppliers and vendors, utility bills and much more. Small businesses often offer shorter payment terms or request some or all of the money up front.

Whichever pathway you choose it’s in your best to set the terms in which the full amount is to be paid. Always ensure that any outstanding debts have clear payment terms set and agreed upon before commencing the transaction. For example you might set a 50% deposit with the remainder to be paid in 30 days or at the completion of the engagement (whichever comes first).
Don’t operate on the debtors’ terms and be caught waiting for payment to occur without any agreed terms in place. It’s up to your business to ensure you’re always in control of cash flow.

Automate Payment & Overdue notifications

With current technology it’s even easier to schedule automated payments via credit card allowing you to receive payment within 2 – 3 days. No longer do you need to be a retail store or business giant to accept credit cards.

With each credit card transaction you do of course pay a percentage of the sale to the credit card company and possibly a monthly or annual fee too. When it comes to recovering outstanding debt credit card transaction fees can quickly save your business cash and time.

Following up on overdue accounts is time-consuming too. Again, if you use a system such as Xero or MYOB you’ll be able to automate your overdue notices allowing your customers to receive over notifications without constant review of your outstanding receivables.

Catch credit problems early

Debt outstanding for 6 months or more have a collection rate of 47% or less therefore greatly reducing the chance that you’ll receive payment from the debtor. By implementing all of the steps prior you’ll be in the best position to be armed with the facts, terms and records which will allow you to confidently address any continued customer payment concerns.

Written by Richard Thompson

Richard Thompson is the Managing Director and owner of JMA Credit Control and has over 25 years’ of trusted experience. Richard has a wealth of knowledge in Credit Management and Debt Recovery ensuring client’s recovery bad debt quickly and cost effectively.

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