Cash flow is the lifeline for any growing business and maintaining positive cash flow is essential to keep operations running smoothly. Negative cash flow usually comes from one of two places: not enough working capital and slow receivable collections. These things lead to great stressors on any business, like settling outstanding debts, paying salaries, purchasing equipment, or, worst of all, keeping the company’s doors open.
Small business owners might have a tendency of not paying attention to cash flow, but to maintain positive money circulation, working towards cash flow management is necessary. Here are few methods explained to improve your small business’s liquidity and avoid shortages in cash flow:
Track and Collect Receivables
- Account receivables are the money owed to your business, and keeping them past the due date will make it harder to collect. Slow-paying customers should be reminded well in advance through phone calls, text messages, or an e-mail.
- Do not let the customers set their own repayment schedule. Instead, proactively be in touch after an invoice is sent. Remind them of the approaching due date, and if it slips, charge interest on overdue payments. Consider collecting the money owed to your business an upmost priority.
- Long-term financing should be taken for equipment purchases and capital investments, while working capital should be preserved for regular business operations.
- Long-term debt has fixed rates, smaller monthly instalments, and allows the opportunity to refinance existing high cost, short-term debt. Small business owners, rather than relying excessively on expensive short-term debt, must opt for long-term financing and eliminate potential financial risks.
Liquidate Cash Tie Up With Assets
- A quick way to readdress cash flow problems in business is to liquidate assets. Non-working equipment or inventory that is worthless can be sold to improve cash flow and meet your business obligations. To liquidate quickly, offer inventories and equipment at attractive prices, making it hard for potential buyers to resist the offer.
Offer Discounts or Rewards for Quick Payments
- Late invoice payment has become a global issue. The team from Fundbox conducted a research to understand the impact of late payments. The team identified that SMBs fail to fill large orders, buy new equipment, or hire new employees and eventually lose their competitive edge in the market due to unpaid invoices.
- Using the right combinations of carrots and sticks will keep you out of cash problems. The solution? Create a time frame and incentivize customers who pay within the slot, offer early-bird discounts, or something else along those lines. Charge penalties or interests for late payments, to push prompt payments and reduce defaulters.
Request Advance Payments
- If you have secured a contract, do not hesitate to ask clients for deposits or down payments. This will help you avoid the risk of non-payments. Getting advance payments ensures you better backup through the course of a project. Maintaining good cash flow will prevent funding from your pocket or seeking financial assistance from external sources.
- Make it a habit to raise invoices upon completion of projects. An excellent and efficient way is to use online invoicing. With a process like this, you can automate invoices while also making it easier for your customers to pay you, allowing you the best opportunity to get paid on time.