Cash flow is the lifeblood of any small business. If you can’t manage your cash flow effectively, you will quickly find yourself in trouble.
It’s not enough to have sufficient cash to see you through from one month to the next – ideally, you should be able to syphon away some money each month to create a cash reserve that will act as a buffer in times of trouble.
However, improving your cash flow can be difficult and confusing. It’s best to seek professional guidance with regards to your cash flow, but there are also many small changes that you can make today to improve your situation.
Let’s take a look at five small but meaningful steps you can take towards a healthier cash flow for your small business.
#1 – Take Out a Line of Credit
A line of credit is a great way to improve your cash flow situation, as it allows you to borrow money when you need it and pay it back over time, but with much lower interest rates than a credit card.
This is a more flexible option than taking out a loan, as you won’t have to worry about interest rates until you actually need the money and can focus on improving your business.
With that in mind, don’t wait until you need cash to arrange a line of credit. It’s best to do it when things are going well for your business, as this gives you the freedom to shop around and puts you in a stronger position to negotiate favourable terms.
#2 – Adjust Your Payroll Cycle
Adjusting your payroll cycle can give you some more breathing room when cash is tight.
Of course, you still need to pay your employees on time, but try to do so at a period of the month when you know your accounts are flush with cash. It’s also often better to pay monthly than weekly, as it reduces the number of paydays you have to cover.
#3 – Collect Receivables Quickly
If you have customers who owe you money, it’s important to collect those receivables quickly.
This means staying on top of invoicing and following up regularly. It can also be helpful to offer incentives for early payment, such as a discount or a waived late fee.
At the same time, implementing late fees will act as a powerful motivation for customers to pay on time.
#4 – Negotiate Payment Terms with Suppliers
It’s important to build strong relationships with suppliers so that you can negotiate good terms with them. This means discussing the possibility of a longer credit period or a smaller deposit on large orders.
It can help to have some leverage over suppliers, such as a long-term relationship or the prospect of large orders. However, sometimes even just asking is enough to get better terms on payment.
#5 – Be Careful with Credit Policies
Credit policies are an important part of cash flow management, but they can also be a double-edged sword. If you’re too lenient with credit, you’ll end up giving out more credit than you can afford and will struggle to collect payments. However, if you’re too strict, you might lose potential customers who would have been happy to pay over time.
It’s important to find a balance that works for your business and to be clear about your credit policies from the outset. This means stating the terms of payment, any late fees that will be applied, and how long customers have to pay their invoices.
Be sure to update these policies regularly as your business changes, or you may end up with a policy that’s out of date and no longer relevant to your customer base.
These five simple, but powerful steps will help your business manage its finances more effectively and increase the amount of money it has to invest in other areas. Remember that, over time, a little plus a little equals a lot