When you run a business managing your cash flow can feel like a continual battle. It can be frustrating watching all the bills come in every month while you seem to be constantly waiting for your customers to pay. If you are launching a startup the reality of managing your cash while waiting for that first sale can become stressful.
Here are some top tips to make some small changes that may help improve your cashflow over the coming months and make things a little easier. After all even if you can see profit coming in in 6 months time, if you can’t pay your overheads in the meantime, you could go out of business getting there.
1. Understand your overheads
Overheads are your operating expenses such as rent, administrative staff and other office running costs. These need to be paid on a regular basis, often monthly and it’s likely that you can’t delay their payment. By looking at your profit & loss account or putting together a simple list you will be able to work out what the amount is that you need to pay each month so you have an idea of the cash (working capital) you need to run. Reviewing this list of expenses could also give you an idea of where you may be wasting money or areas you can save money, all helping to contribute to a healthier bank balance.
2. Build a cash projection
Cash balances tend to peak and trough. By building a projection you will better understand where these peaks and troughs are, why they are happening and how you can prepare for them for example by extending our supplier payments or asking your bank for an overdraft facility. Building a projection will be an invaluable tool to starting to manager your cashflow better and will give you so many insights into your business.
3. Check profit margins
Your margin on a sale or a project is the income less direct costs (anything you had to buy to deliver that specific sale). If you have completed sales and projects already, why not take some time to review them and understand the costs of delivering them. You can investigate whether you could have reduced your costs and increased the profit – it all translates to cash in the bank.
4. Don’t be afraid to chase for money you are owed
Slow paying customers is a common problem almost all businesses come up against, so you are not alone with this problem. Surprisingly the larger the customer the slower the payment cycle can be. Don’t be afraid to pick up the phone to your customers and start chasing them as soon as your invoice goes overdue. The longer you take to remind them, the longer you will wait for the cash to arrive in your bank account. If you don’t have time you could consider enlisting the help of a bookkeeper to stay on top of these debts on a regular basis.
Of course, don’t forget to invoice in the first place and get the first invoice out as quickly as you can. Its hectic running a business and the excitement of closing off a project can be distracting. Make sure invoices are sent to your customers in a timely manner and if you are too busy, consider getting a bookkeeper or accountant to help you stay on top of your invoicing process. You’d be surprised how many businesses forget to raise invoices or take weeks to bill a customer! Review your invoicing process and make your process is being followed.
5. Accept credit card payments
Depending on your business, you could encourage your customers to pay your invoices by credit card. There are so many methods of securely accepting credit card payments using virtual terminals – paypal, izettle or stripe are great options for which you don’t need a merchant account and integrate neatly with accounting softwares like Xero and Quickbooks, so you can add a link on your invoice to take them to a payment screen and see when the invoice has been paid in your accounting system.
6. Ask for up front payments or milestone payments
If you are in the fortunate position of having won a new contract, you could approach your customer to ask for an up front payment, monthly or milestone payments. This will help keep the cash coming in and match the payment the costs involved in delivering your new contract.
7. Pay your suppliers slower
If you have long term relationships with your suppliers or are about to place a large order, you could ask for extended payment terms, pay in instalments or discuss a bulk discount. If you are a start up you may be struggling to obtain credit terms from suppliers as you are in such early stages but we suggest shopping around suppliers to see who offers you the best credit terms or even use a credit card if you can’t get the extended payment terms you need.
There are so many different types of financing options available to business. So if you do find yourself trapped in a cycle of being cash rich and then cash poor year after year there could be a financing option out there that may help you through. You could start by calling an accountant or speaking to your bank manager to find out what the most suitable type of finance for your business would be.
9. Different types of income streams
If your primary business income brings with it huge peaks and troughs in cashflow, you could look at other ways to boost your bank balance which don’t require a large investment such as subscriptions based services or packaging up your services into a smaller offering that you can deliver quicker and more regularly to a different group of customers.
10. Avoid holding large quantities of stock
If you buy and sell products try to keep your stock levels at a minimum. Although it may be tempting to pick up a ‘good deal’ it does tie up cash and depending on the speed you sell your stock at, it could be a while before you get your money back.
Every business experiences cash flow problems no matter what the size. But understanding your cash balance and what affects it is vital in running a successful business and reducing your stress levels at the end of each month. Working with an accountant can help you develop robust cash projections, give you insights into your figures and help you plan for times where cash flow will become a problem.