Successful entrepreneurs agree that the most important thing in business is not the bottom line or the next Big Idea but the ability to keep going, especially when times are tough. Running out of cash can quickly escalate into a crisis that can sink your business.
That’s why cashflow is the most common problem reported among new startups, with nearly half of all SMEs reporting serious cashflow problems within their first three years. So how do you make sure your own business doesn’t become a cashflow casualty? Here are some quick tips that could make a big difference to your chances of success.
1/ Invoice without delay
Managing cashflow successfully requires balancing money coming in and expenses going out with precision. Late-paying clients is the single biggest reason cited for cashflow problems by business owners and this problem is often exacerbated by lax invoicing procedures. The sooner you send that invoice, the faster you’ll get paid so always invoice your clients as soon as you’ve finished the job.
2/ Follow up
Reduce the risk of late payment by confirming receipt of invoices at the earliest stage. You don’t want to wait until an invoice is due to discover that your client never received it, so invoice by email with a ‘read receipt’ setting as well as by regular post. A friendly email reminder a week before your invoice is due can also help to ensure it’s paid on time. If you wait till it’s due, chances are you’ll be paid a week late.
3/ Build relationships
It sounds obvious but building solid and lasting relationships with suppliers, customers and clients is the key to longevity in business. If a client likes you, they’re more likely to pay you promptly or cut you some slack when you have a problem. The golden rule of treating others as you want to be treated yourself applies to business as much as elsewhere so don’t expect clients to act responsibly if you don’t do it yourself. Be firm but fair.
4/ Agree strict payment of terms and stick to them
As fair as you might be, some clients are just going to push the envelope and that’s when you need to be firm too. You should ensure there’s no ambiguity about payment terms before agreeing any deal and these terms should include incremental penalties for late payment by clients. Late payment is standard practice for many companies so make sure your business is compensated for bad behaviour. Offering an ‘early payment’ discount or other incentive should also help you get your money faster.
5/ Consider Finance/Lending
Securing a business loan or cash advance at a critical moment may make the difference between a business surviving a rough patch and going under. With traditional bank loans still hard to come by and slow to process for many small businesses, it’s worth exploring alternative lending options. While fees may be higher than long term bank loans, short term loans can provide a critical lifeline to businesses struggling with cashflow problems.
6/ Technology is your friend
With tablet and smart phone apps, as well as cloud software, there’s no excuse for not keeping up with your business accounts, even when you’re on the move. The more closely you monitor your cashflow, the less likely you’ll be to run short as you’ll know when to hold back on spending and keep a little extra in reserve for necessary outgoings.
7/ Keep profits second to cashflow
Your business can be making healthy profits on paper but still sink if you can’t make your payments to staff and suppliers. Overtrading – transacting more business than your working capital can sustain – often occurs when companies expand too quickly in pursuit of profit. This can quickly lead to cash drying up with disastrous consequences. Prioritise a healthy cashflow and your profits will manage themselves.
Maintaining a good cashflow is a careful balancing act, weighing the need to maximise available funds through investment against holding back enough capital to ensure financial obligations are met. Following these cashflow tips will help you get the balance right and keep it that way.