Improve Small Business Cash Flow

Edited by Samuel Muriithi, Shelley, Melissa Rae, Eng

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There are two tenets of running a small business that entrepreneurs need to hold dear. First, cash is king. Second, prudent cash flow management is the lifeblood of a small business.

Running a fledgling small business is no walk in the park. For entrepreneurs it's a learning curve that's fraught with difficulty. Just about every activity or intervention that is intended to grow and improve the business e.g. increasing production cost-effectively, increasing sales, stepping up the marketing effort, employee motivation and increasing customer satisfaction requires cash. With a cash flow problem, therefore, it's quite difficult for a business to pull ahead.

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Improve Your Cash Flow

Cash flow – the manner in which a business receives and pays out money – can be positive or negative. If positive, i.e. where cash inflow exceeds cash outflow, it means that your business is enjoying good financial health. On the other hand, poor and negative cash flow shows that your business is in dire straits; if the trend is sustained chances are that you might soon be forced to close shop.

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Improving cash flow, therefore, is imperative to ensure that your small business will survive and thrive. This objective will require you to do two things:

  • Ensure that sales are converted into cash as soon as possible
  • Ensure that cash outflows are reduced and extended thereby allowing you to build a cash cushion

Here are strategies to enable you to succeed in this regard:

  1. 1
    Revamp your cash flow system.
    Your cash flow system should be fully functional and well capable of ensuring that the business is not losing money. Basically, the system you have in place should enable you to do the following:
    1. Easily observe your cash position as well as what is owed to you and what you owe suppliers
    2. Issue accurate invoices promptly
    3. Accept credit card payments online
    4. Track inventory levels easily to facilitate accurate restocking and avoid wastage
    5. Make sales forecasts thus allowing you to plan ahead based on customer buying patterns
    6. Easily access preferred suppliers information including supplies received and prices charged
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  2. 2
    Practice prompt accurate invoicing and contacting of late-payers.
    Invoicing errors and slow dispatch of invoices are two rather obvious causes of poor cash flow that you can easily root out by deciding to be more meticulous. Nevertheless, you can always invest in software that can help with your invoicing tasks. Such include QuickBooks, and online services like Invoiceable. While maintaining a good relationship with customers is of the essence, you really can't afford to be too friendly when payments are due. Late-payers need to be contacted and unrelentingly confronted in a polite yet firm manner until they commit to a payment date.
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  3. 3
    Adopt cash flow management technology.
    If you reckon that your current cash flow system is not up to the task then you may consider it worthwhile to invest in software or an app that will help make things much easier. Some of the options available include products from QuickBooks, Pulse, PlanGuru or Float.You can also opt for SCORE's Excel cash flow template or simply use an Excel spreadsheet on your computer.
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Reconsider Your Sales Practices

  1. 1
    Grow your sales volumes.
    The logic is quite simple – sell more, get more cash. Don't expect immediate or automatic success though. Increasing your sales volumes will require you to convince existing customers to buy more, as well as find new customers to sell to. Acquiring new customers requires time and money. It's nevertheless an unavoidable necessity with regards to growing a business and improving its cash flow.
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  2. 2
    Create new business opportunities patiently.
    Resist the urge to supply goods on credit – remember that your aim is to secure more cash, not more woes in your account receivables folder.
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  3. 3
    Insist on a security deposit for substantially large or custom orders.
    As an entrepreneur, you really can't afford to be naïve when running a small business. Business transactions don't always go according to script and it's therefore prudent to put in place measures that will help to mitigate potential losses when things go pear-shaped. Requiring customers to pay a security deposit that is half the total price of an order is particularly important as a means of compelling them to make full payment. Doing so will also cover you somewhat in case a customer decides to abscond.
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  4. 4
    Demanding a deposit for custom or unique products is also vital.
    These goods are characterized by a limited sales value, typically only to the person making the order such that you may have no choice but to receive a reduced payment when making the delivery. Receiving a security deposit beforehand will however enable you to forestall this risk. Shrewdly avoid being subjected to this requirement yourself; paying deposits will eat away at your cash cushion. Instead, convince vendors to supply orders by making references to your good credit history and healthy relationships with them.
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  5. 5
    Negotiate mutually-beneficial terms of payment for large orders.
    Where it is impossible for a customer to pay an initial deposit based on company size and/or policy you should be creative enough to think up a solution that will work for both parties. This will obviously be better than walking away from a potential deal altogether. A practical solution in this situation can take the form of a payment structure whereby payment is made upon the completion of every stage involved in delivering an order. In this case, ensure that each of these payments sufficiently covers the expenses you have incurred and then some.
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  6. 6
    Encourage prompt payment by offering attractive discounts and/or charging interest penalties.
    Invoices are typically settled 30 days after receipt and a 2% discount is offered should the payment be made within the first ten days. Naturally, some customers will take advantage of these terms but others will prefer to settle accounts on day 30. Depending on your situation and knowledge of your clients' payment habits, you can decide to offer the latter type of customers more attractive discounts that will tempt them to pay up much earlier. Customers who have a habit of making payments well after day 30 can be brought back into line courtesy of a late payment interest penalty. While this may not work effectively, your clientele will at least understand the importance you attach to prompt payments. Some clients don't need such motivation, though. You certainly can't employ this strategy on a major client who always pays up on day 40.
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  7. 7
    Make receiving payment more convenient.
    If your customers have a hard time making payment then you will definitely have cash flow problems. There are a number of payment solutions that you can adopt for greater convenience. Tradeshift and Basware are tools that will enable your clients to quickly settle invoices via the Cloud without the fuss, errors and holdups typical of the paper invoice trail. With Zapper Scan-to-Pay you can issue customers with invoices bearing QR codes. A customer will just need a few seconds to scan the code using a smartphone, confirm the amount and settle the payment.Credit cards, PayPal and EFTPOS are some of the other options worth considering.
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  8. 8
    Employ prudence when extending credit to customers.
    Your nascent small business may often need to extend credit to its customers. While this is really a necessary evil you should do the most to mitigate potential delayed payments and losses. Take some time to study each customer's credit report and find out if they settle their bills promptly. Accepting credit cards is an option you can explore as well. Despite incurring a charge, typically 2% to 5% of the sale, you'll at least be better guaranteed of receiving a prompt payment.
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  9. 9
    Introduce fixed rate payment packages.
    By introducing periodic payment packages, instead of accepting hourly rate payments, it may be possible for your business to enjoy better cash flow. This is especially applicable for a freelance service business whereby estimating one's monthly income based on hourly rate payments is quite impossible. Nevertheless, introducing retainer packages whereby clients will have to pay in advance to in order secure your services for a given number of hours each month will definitely enable you to be in charge of your finances. Receiving advance payments means that you can effectively account for your income and expenditure based on actual figures and not mere estimates. You will also be guaranteed of full payment unlike the case for the hourly system where incidents of client absconding with payment are commonplace.
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  10. 10
    Introducing subscription sales.
    A subscription program will work effectively if your business' products or services are repurchased severally every year e.g. magazines, pool cleaning services and landscaping services. Implementing this program means that your customers will pay upfront in order to receive your product and/or enjoy your service. Two major advantages accrue from this arrangement. First, you should be able to cover all your expenses. Second, future sales volumes are secured.
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  11. 11
    Make the most of your vendors terms of sale.
    While ensuring that your customers pay up as soon as possible, you should on the other hand delay making payments to your vendors to until the last possible date as provided in their terms of sale. Take full advantage of sales terms that don't feature late payment penalties. Nevertheless, this strategy will only work effectively if shrewdly employed. This means that you should always make a payment on the last day it is due. In case you are unable to make a payment get in touch with the concerned vendor in good time, explain your situation, make a commitment and honor it. This is the only way vendors will be willing to supply goods on credit in the future based on your cordial relationship and good credit history.
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  12. 12
    Work closely with lenders.
    It is most advisable to cultivate a healthy relationship with financial institutions such that you can be able to secure a loan when the need arises. Banks typically consider the following assets:  
    1. Accounts Receivable (AR) – This is typically a line of credit that will allow you to take out a loan not exceeding a preset percentage of total AR (60% to 80%) due within a 60 to 90 day period.
    2. Inventory – Your bank will generally prefer to work with finished or raw inventory as this can be easily converted into cash unlike in-process inventory. The ratio of loan to inventory is typically 50%.
    3. Equipment – It is possible to secure an emergency loan on useful equipment that is in good condition.
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  13. 13
    Consider a factoring arrangement.
    Instead of borrowing money on your Accounts Receivable (AR) you can opt to sell them to a third party, a non-bank financier. This is referred to as factoring. The third party, or "factor", will advance you a negotiated percentage for each of the invoices in the AR. Terms of the sale, i.e. whether it's "recourse" or "non-recourse", and the fee payable to the factor will also be negotiated. Factoring is typically more expensive than what your bank can offer. It's however less restrictive and as such a viable option for new businesses or those with a poor credit history considering that the factor will be more interested in the creditworthiness of the customer who owes your business money.
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  14. 14
    Borrow from your suppliers.
    In case your efforts to secure funds from banks or factors come a cropper you can consider approaching your suppliers. From a practical perspective, a supplier has the most to gain from your continued existence and is therefore likely to be more accommodating. Your chances will be even higher if a supplier values your cordial business relationship and regards you as being creditworthy.
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  15. 15
    Make use of interest-earning accounts.
    Deposit your cash balances in an interest-earning checking account. These accounts typically attract lower interest rates than is the case for savings accounts, certificates of deposit (CDs) and money market accounts. The bulk of your funds should however be in a higher-paying account from which you can then transfer money into the interest-earning checking account so as to attain the required minimum balance and also have enough to cater for all the upcoming payments due that week or month.
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Rethink Your Inventory Management

Poor inventory management, i.e. holding insufficient or excessive inventory, translates to unproductive cash outflow, a trend that you should be keen to reverse. With the help of an effective cash flow system you should be able to keep tabs on your inventory requirements. Such a system should inform you of your inventory requirements based on customer buying patterns and also help you to keep track of the same thanks to the First In First Out (FIFO) principle. With an effective system in place, you should be able to reduce inventory wastage and improve cash flow.

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  1. 1
    Maintain and repair capital equipment.
    Ensuring that crucial business equipment is expertly maintained and repaired in case of damage is definitely going to boost cash flow – unlike a case where equipment is immediately replaced. Your business will also lose less cash by opting to hire reputable freelance technicians and repair pros instead of engaging the equipment's manufacturer. Sourcing for replacement parts from third-party suppliers instead of the manufacturer is also going to be more cost-effective.
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  2. 2
    Buy used equipment instead of brand new equipment.
    Purchasing used equipment rather than brand new equipment is another prudent way to restrict cash outflow. With the help of the internet it is now possible to quickly locate just about every type of machinery or equipment you require, get in touch with the seller and arrange for a demo. Used equipment isn't necessarily old equipment; chances are that you'll find a piece of equipment that's only been very briefly used and/or in very good condition.
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  3. 3
    Sell off obsolete equipment and excess inventory.
    Equipment that is no longer in use should simply be gotten rid off; having it lying around means that the business is paying for wasted space and that capital is wasting away instead of being put to better use. The same applies for excessive inventory, especially in a market known for rapidly changing customer preferences. Retaining such inventory for too long is obviously going to be expensive for the business. The knowledge that eventual sales proceeds will be minimal should be enough motivation to sell off this inventory sooner rather than later.
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According to Philip Campbell "poor cash flow management is causing more business failures today than ever before". The onus is on you to put in place measures and strategies that will help your business to enjoy healthy cash flow and thus have better chances of surviving and growing into a successfully run entrepreneurial venture.

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Categories : Business & Management

Recent edits by: Melissa Rae, Shelley, Samuel Muriithi

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