In simple terms, your cash flow is a measure of what you’ve got coming in and what you’ve got going out. On that basis, it’s all too easy to assume that if the former figure is higher than the latter, then all is well.
However, you also need to consider when each payment will be received or made. In other words, it’s all very well if you’ve billed $26,000 to your customers and only have monthly outgoings of $13,000, but that’s not much consolation if they’re paying late and your suppliers are demanding payment immediately.
These kinds of voids are, ironically, particularly dangerous for product-based businesses that are fast-growing and profitable. Why? Because every time you land a new customer, you will need to purchase raw materials to fulfill their orders (not to mention investing in new people and equipment) before you get paid.
If those customers turn out to be slow payers, your profitable and growing business could face cash flow problems and possible liquidation.
So what steps can you take to transform your cash flow?
1. Forecast your sales and outgoings accurately
Forewarned is forearmed, so make certain that your cash flow forecasts are accurate, both in terms of figures and timing. Looking at last year’s sales should give you a good idea of what you will make this year (assuming, of course, you haven’t won or lost any major customers in the meantime).
Then calculate the cost of producing your goods and services, as this will help you adapt your projection should substantial new orders suddenly come in.
At the same time, remember to include all your fixed expenditures—the cost of maintaining your premises and paying your staff, including salaries, rent, business rates, bills—and of course tax demands. Take a look at the golden formula for cash flow forecasting in small businesses.
2. Compare your projections to reality
However, your forecasts will be useless unless you continually compare them to reality to see whether you got your figures right.
Doing so on a month-by-month basis will enable you to fine-tune your figures, in turn enabling you to project how much cash in hand you will have a week, a month, or even a year down the line.
3. Prepare more than one cash flow projection
A good way to protect yourself against any unpleasant surprises is to prepare three different projections: a best-case scenario, a worst-case scenario, and a middle-of-the-road option.
To produce these figures, you will need to look at the way your market is evolving; consider seasonal cash flow problems; consider whether new competitors are likely to present a threat; and think about whether your existing customers are fully satisfied or are considering other suppliers.
4. Make sure you’re being realistic
Don’t give in to the temptation of assuming that all will be well; an unrealistically optimistic forecast will quickly lead to trouble.
Make sure you don’t tweak dates this way and that to ensure that the figures look good. If there are going to be problems down the line, you want to know about them now so you can mitigate them.
But what steps can you take to deal with a cash flow that’s looking marginal?
5. Invoice your customers quickly
The sooner you invoice, the sooner you get paid. Some businesses regard invoicing as a tiresome chore—something to be done only after revenue-generating activities have been completed.
While it’s crucial to pursue growth, growth is irrelevant if your cash flow falters and you go out of business. Set aside specific time for invoicing and prepare all the information you need in advance.
6. Make it easy for your customers to pay
Try to offer a range of different payment methods, as not all customers will opt for bank transfer. Cash, checks, debit and credit cards, and online and offline money transfer services are all useful options—and could result in getting paid much faster.
7. Consider discounts for early payment
Some clients may choose to pay much faster if they can save a little cash. While you probably offer standard 30-day terms, you might want to introduce an additional clause, such as a 5 percent discount for payment within a week.
8. Implement a firm credit control policy
Conversely, don’t be afraid to take firm action with persistent late payers, who could collapse your company. By carefully monitoring unpaid invoices, you will be able to identify problem customers.
This is particularly important as late payment can become non-payment. The longer the receivables remain outstanding, the lower the likelihood of turning them into cash.
In fact, according to a study by Dutch firm Atradius, who surveyed the Americas on invoice payment behavior, 38.4 percent of B2B invoices issued were unpaid by the due date, 5.2 percent of invoices were still outstanding more than 90 days after their due date, and 2.7 percent of respondents receivables were written off as uncollectable. Atradius concluded that on average, businesses in the Americas lose 51.9 percent of the value of invoices that are not paid within 90 days of the due date.
By implementing a clear and consistent collections policy, you ensure that all customers are treated fairly and that payments are made in line with your agreed terms. Query overdue invoices regularly and implement an escalating series of reminders as due dates are missed before involving a debt collection agency.
Securing payment faster is only half the equation, though. What can you do to reduce or defer your own outgoings?
9. Take full advantage of creditors’ payment terms—and renegotiate them if you can
If you pay your suppliers by electronic transfer on the last possible day, money remains in your account for as long as possible while you remain compliant with their payment terms.
However, if your cash flow is still in trouble, you could consider asking whether they will extend due dates or accept payment in stages. It’s important to remember, however, that these negotiations to help your cash conversion cycle are more likely to be successful with suppliers with whom you have a close and ongoing relationship.
10. Consider changing suppliers
If your current suppliers cannot or will not work with you to extend payment deadlines, you could consider changing. When evaluating potential new suppliers, you should carefully balance the deals they offer against the payment terms they specify.
11. Manage your stock carefully
If you have huge volumes of stock sitting in your warehouse, that represents money that could otherwise be bolstering your cash flow.
By tracking sales carefully and adjusting your orders appropriately, you can minimize stock holdings and free up plenty of cash.
12. If you hit a cash flow crisis, take out a business loan
Even if you implement all the advice above, you could still run into the odd cash flow crisis—it’s simply the nature of doing business. Should this happen, a small business loan can tide you over.
Don’t forget that while banks have significantly tightened their lending criteria since the financial crash of 2008, alternative lenders are often much more flexible and apply quite different criteria, so you stand a good chance of being accepted.
Carl is Managing Director of Cashsolv. He offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business.