3 tips to improve your business cash flow
- Posted in Managing a Loan
Being self-employed and running your own show has benefits, but there’s a lot to owning a business and keeping a healthy cash flow can be critical.
Carefully managing your money can keep you away from any credit impairment or even worse, bankruptcy.
That means regular check-ins on both your positive and negative cash flow to help track and control the flow of funds in and out of your business. It’s not always easy. Many business owners focus on sales and business growth to solve a cash-flow problem, but often overlook the opportunities in cash flow itself.
So here are at least 3 tips that can get you started towards a healthy cash flow.
1. Reduce terms or offer discounts
As a small business or if you’re self-employed, you can often suffer from receiving late payments from your customers. It not only puts you under pressure, but you can end up in debt and in a negative cash flow. So here’s the tip. Try reducing your terms. Not by too much, but still a reasonable amount of time for your customer to pay.
You might like to try 7 or 14 day-terms instead of 30-day terms. It means you get the money you’re owed sooner rather than later. Another option is to perhaps offer a discount for prompt or early payment or encouraging automated/direct debit payments. If you do offer discounts, make sure your early payments don't leave you with any cash flow shortfall. If you're affected by late payments you could also negotiate better payment terms with your suppliers, paying them at 30 days instead of 7 or 14 to help even out your cash flow.
2. Control your inventory
Your inventory can play an important part in helping cash flow. If you tie up too much of your money in unsold inventory it can cause cash flow problems. Prioritising is the key. In simple terms, keep the items you need most, not the ones you don’t. What are your top sellers? It will help you reduce your costs and lower your inventory level by carrying smaller quantities for a shorter time. Simply order as you need. Perhaps think about the value of selling lower-priced products instead or less of the expensive, high dollar value items. The turnover of lower-priced products can have a greater impact on your business.
3. Forecast and plan ahead
You can’t always see what’s around the corner for your business. However, a little forecasting can sometimes go a long way. While you might not be able to predict any upcoming surpluses or shortages, to be able to accurately forecast your cash flow and estimate the amount of money you expect to flow in and out of your business over the next 12 months is a great help. You need to think about both your projected income and expenses.
It’s a good idea to track your cash flow on a monthly basis over time and using those records to compare where you are month on month in the coming year. It’ll help you get better at creating cash flow forecasts. You will see any patterns that emerge, like seasonal demand. And that will assist in giving you the ability to make solid business decisions and predict cash flow problems in time to do something about it.
Cash flow projections are the key to making smart and profitable business decisions. To keep cash flow healthy, you also need to keep on top of your wider obligations and not forget to set aside money as you go for GST and tax. If you're struggling with your business cash flow or a tax bill, it could be a good idea to talk to a financial advisor.