Are You Looking for Practical Strategies for Your Business to Maintain a Positive Cash Flow?
Cash is King! You may have heard this expression referring to the importance of cash flow in the overall fiscal health of a business. While it is often said and written, in reality, this can be a difficult philosophy to live by for businesses that rely on credit and inventory on hand to build their sales base. And while there is no magic solution to achieving positive cash flow, there are some simple and practical things growing businesses operating on a negative cash flow cycle can be doing to better manage this.
Here are my Top 5 Tips for SME’s Looking to Better Manage their Cash Flow…
1. Implement Proper Credit Procedures with your Customers
Good credit procedures include:
- Having the customer complete a credit application and completing credit check reportson customers.
- Advising customers of their payment terms and when their invoices will be due. Welcome letter emails when you sign the customer up can be a great way of doing this and at the same time advising customers of any other important information they need to know.
- Enforcing payment terms from the first invoice and ensuring you follow up. It is much easier to get a new customer to pay on time than it is to enforce terms later down the track after they have gotten used to paying late. Automated payment reminders directly from your system are a handy way to manage this.
- Once you have set the standard it is also important to have robust procedures in place to follow up on anything that is overdue and flag any customer balance for which collection might be doubtful.
- Make it easy for your customers to pay by offering multiple options including EFT and Credit card and clearly listing payment details on your invoices.
2. Maximise your Free Credit from Suppliers
Established businesses with a good credit rating usually have a prime opportunity to get interest free credit terms from your suppliers. My guide for managing this is as follows:
- Find out Standard industry credit terms and as a minimum push your suppliers to provide these to you.
- Some Suppliers will make you go on COD to establish a track record. Ask to minimise this to 1-2 orders, see if they will accept a credit card (no surcharge) for payment for these orders and set a Calendar reminder to follow them up after a track record has been established.
- Suppliers may ask for trade references. Whilst the aim is to always pay your suppliers on time the reality is, depending on the stage of your life cycle, this isn’t always possible. However, make sure you have at least 2-3 Suppliers you always pay on or before time that you can keep as reliable references.
- Know your Business and Personal Credit Rating. Lenders & Suppliers use your credit score (or credit rating) to decide whether to give you credit or lend you money. Knowing this can help you negotiate better deals or credit terms, or understand why credit was rejected.
Note: You have the right to access your credit score and credit report for free, which is available from online credit score providers, usually within minutes.
3. Use a Credit Card Smarter
A Credit Card can be a cheap additional line of credit with suppliers, if used wisely. This means avoiding paying Vendors that charge a high surcharge, paying the balance due on time so you don’t incur interest and maximising credit by using the card at the beginning of the statement cycle. Some of the benefits of using your Credit Card as an additional line of credit is it is usually unsecured funding, interest free and has low fees (if paid on time), is easy to apply for and most importantly can grant you up to 60 days extra time to pay your bills!
4. Working Capital Finance Solutions
Attempting to grow a business without adequate finance is a common challenge for small businesses. If managed properly and for a purpose debt from external finance providers can be the solution. In particular I encourage using external finance to cashflow business equipment purchases and overseas supplies (usually requiring prepayment or deposits). While banks are the traditional model for this and usually offer lower interest rates, alternative options do exist which are a bit more expensive but usually more flexible when comes to security and documentation required. You should always however carefully read the terms and conditions of any Finance contract, ensure the product is right for you and have an achievable plan for repaying the debt.
5. Forecast! Forecast! Forecast!
A cash flow forecast is vital to successful planning. A good cashflow forecast projects your cash outflow commitments and cash inflows and is something you can regularly refer to and easily update once actuals are realised. A forecast can take many forms and be as formal or informal as you like but as a minimum, I recommend having an annual forecast (to forward project cash flow requirements, financing needs and opportunities) and a monthly/weekly forecast which are more practical and help you to ensure you are meeting your short term obligations and form the basis for immediate actions such as payment schedules, debtor collections or organising immediate finance.
Achieving positive cash flow in your business comes down to being smarter about how you manage the components of your supply chain. If you are making profits and are employing good strategies, like the ones I have provided above, then there is a high chance you will remain cash flow positive. But the tips I have provided are no silver bullets and require ongoing management and refinement as business and market conditions change – the very best businesses are agile and tactile in all business operations.
Disclaimer: This is article provides general advice and is not intended to be tailored accounting or financial advice. Advice may vary depending on your business specific circumstances.