I know, I know. You’ve heard it before. Hell, we’ve said it before. Cash flow is important. Really important. Cash flow is the lifeblood of your business. If you manage it poorly, your business will haemorrhage, and suffer massive internal bleeding. And if you don’t stop the bleeding your business will die.
“But this shouldn’t be a complex issue, surely it’s as simple as collecting the money from my debtors while paying my creditors?”. Yes, you’re right. This is the basic principle behind your business cash flow, but as a business you’ll have a lot of incomings and outgoings to keep track of, and it’s easy to overlook things. Add to this the fact that you can be waiting up to 120 days for payments from debtors (and that’s if they pay on time), and you could be looking at having more outgoings than incomings, and that’s where you’ll start to be in some trouble. With that in mind, here are some simple tips to help you maximise cash flow, and have your business live a long and healthy life.
Have a realistic budget
Having a realistic budget and forecast is the foundation on which to build good cash flow. Generally speaking, SMEs are not prepared to experience rapid growth. Many SMEs underestimate the increased costs they’ll experience in the face of this growth. Making sure you know your growth pattern is paramount to success. Track sales patterns, know when you’re going to be busy, when you’re going to need more cash on hand. But don’t be too strict with your budget. Leave some wiggle room; setting it too tight will mean the slightest change in business will blow it out and throw you into crisis mode. This is where you start to unnecessarily cut costs, and kill any potential growth you were going to have.
Take a closer look at your payment terms
If your customer payment terms average 60 days but your supplier terms average 30 days, then you aren’t getting paid until 30 days after your debts are due. This means you have to fill that gap with working capital from somewhere else. Ideally your customer and supplier terms balance each other out by negotiating terms that work for you and your suppliers/customers. This is not always easy, especially if you have large inflexible customers. So you’ll need to make a plan so this doesn’t restrict your growth plans.
Hold your customers to their payment terms
You might think, ‘Oh, I’m sure they’ll pay, I don’t want to be the bad guy’, but that’s bad for business. If you let customers slide with their payments, then it becomes the new standard. Other guides for maximising cash flow will tell you ‘Find out which creditors you can pay late with no consequences, and which will charge you a late fee’; don’t be the ones who are regularly paid late. And keep your suppliers happy by paying them on time. Set customer payment terms and then make sure you hold them to it, you’ve got invoices of your own to pay.
Get a deposit
If you’re going to be working with a client or customer for an extended contract, get a down payment. Not only does it show that you value your time and the work you do, but it sets the standard for payment terms for your clients.
Sell your invoices
If you can’t wait for payment from clients or customers, consider selling your invoices. Think of it like immediately collecting the debt on your outstanding invoice. Essentially, you put your invoice up for auction on a platform like Timelio, investors bid down the cost of finance for advancing the funds, and you get your payment early. Then your customer pays Timelio, who in turn distribute funds back to the investors who bought your invoice. No long drawn out repayments. And its money you’re already owed.
So, if your business is on the verge of flatlining, or maybe just needs a quick nip and tuck, follow our simple guide and you’ll be back to fighting fit in no time. If you think you’re ready to try invoice finance for yourself, contact us or give us a call at 1300 FUND ME.