All businesses need to maintain a certain level of cash in order to meet their day-to-day operational costs. If you’re a small business owner, you’ll be even more likely to know how much of a challenge this can be. Customers can be slow to pay, unexpected costs can arise, or business can simply slow or decline.
You can survive these events by taking a proactive approach to managing your cashflow (the stream of money in and out of your business). It will better prepare you to handle the financial hardships that the majority of small businesses encounter at some point. By following the tips outlined below, your small business will be able to maintain a much healthier stream of cash.
1. Create a cashflow forecast
It may seem like a no-brainer, but too many small business owners only use their bank account balance to analyse their financial condition. However, while that number shows where you stand at that moment, it provides no line of sight into the future. An accurate cashflow projection, on the other hand, can help you identify and react to potential shortfalls in cash long before they occur. By getting a forecast, you can avoid damaging your credit and business relationships by owing money that you don’t have. Furthermore, having a cashflow forecast to share with lenders can help you to secure more credit.
2. Budget and get rid of inefficient costs
Another advantage of a cashflow forecast is that it can help you fine-tune your budget by highlighting costs that just aren’t worth it. By looking at expenses in intervals of months, instead of weeks or days, you can better understand their long-term cost. From there you can determine if – and to what extent – it influences revenue and quantify its value to your business. If the expense exceeds its return on investment, it’s likely that you can cut it from your budget.
3. Present clear payment terms
A surefire way to keep cash coming in to your business is to present clear payment terms to your customers from the get-go. If your interactions with a customer start with a quote, state your terms along with your bid. That way they’ll know what to expect should they chose to do business with you. When the job is complete, state the timeframe in which you expect payment on your invoice.
4. Send invoices immediately
Every day you wait to send an invoice is a day your business is without money it’s owed. A good way to close out a project with a customer and get paid is simply to follow up and gauge their level of satisfaction with your work. If they say they’re pleased, take it as a sign that you’ve done your part and ask for your payment. Don’t feel bad about pushing your customers to settle their invoices. Until they pay, you’re funding their business, not yours.
5. Make it simple for your customers to pay
The easier it is for your customers to pay you, the more compelled they’ll be to do so quickly. Using online invoicing software, you can create and send statements that have direct links for accepting payment via credit card, bank transfer and even PayPal. You should encourage electronic payment, as opposed to payment by cheque. It’s less work for you and the money arrives in account quicker.
Healthy cashflow is essential to the success and survival of any business.
Take the time to create a forecast and always keep good cashflow management practices top of mind when making budget decisions. By doing so, you’ll have greater insight into the financial state of your business and more money on hand to keep operations running smoothly.