Cash flow is the one thing that keeps many owners of small and medium-sized businesses (SMB) up at night. Whether you dread falling short of your payroll commitments, having insufficient money to pay your suppliers or slipping into the red, effective cash flow management can help avoid these issues.
That’s why it’s important to know the tricks of the trade when it comes to establishing a strong and sustainable cash flow. Here are seven tips to do just that.
- Set cash flow targets
It’s hard to hit what you’re not aiming at. Setting cash flow targets and maintaining weekly cash flow forecasts will reveal how you’re tracking against your goals and help you spot bad weather on the horizon. Cash flow forecasts will aid in identifying potential bottlenecks so you can stop them before they occur.
- Require deposits and stage payments
Allowing clients to pay only on completion of large projects will likely cause a snag if you work for extended periods without getting paid. That’s why you should ask for a deposit and staged payments to align with project milestones on all large jobs.
- Invoice early
If you’re invoicing on completion for smaller jobs, be sure to send those invoices out promptly after the job has been completed. Administrative delays at your end may cause you to be bumped into the client’s next pay cycle, which in turn would delay your payment and bruise your cash flow.
- Convert to fixed-rate packages
Switching from billing by the hour to offering your clients fixed-rate payment packages will make for much more accurate cash flow forecasts and help you plan your delivery pipeline to maximise them.
Of course, in order to do so, you first need to build relationships with clients. You can do this by keeping track of their needs and wants. Important business milestones or personal occasions can also be used as a reason to send a little note, which can help make you a trusted and caring partner. With a good database management solution such as Sansan, this can easily be done.
- Don’t penalise, discount
Some businesses choose to penalise clients for late payments by charging an interest fee. However, while effective, this may not be the best way to build long-term relationships and promote a feeling of trust. A better approach may be to offer discounts for fast payment – in essence, using a carrot instead of a stick.
- Use interest-earning accounts
All income helps to keep your cash flow strong, even interest payments. That’s why it’s important to deposit all cash balances into interest-earning accounts so you can maximise the returns you earn on all the money that comes into your business.
- Partner with a debt collection agency
Partner with a debt collection agency to reduce the amount of bad debt you write off and the number of cash flow black spots you experience due to non-payment. They’ll make phone calls, send letters of demand and handle the associated paperwork so it’s easier for you to stay on top of your accounts receivables and not let bad debts accumulate.
Establishing a strong, sustainable cash flow requires accurate planning, attention to how you charge for your products or services, and the commitment to build enduring client relationships that contribute to the stability and success of your business.