Improving your cash flow is really about two things: managing your spending and regulating your revenue. To that aim, there are several ingenious strategies and beneficial services available to assist in smoothing out peaks and troughs:
1. Accounts chart
While it may seem tedious, the first step toward effective cash flow management is understanding how money flows through your firm. You’ll need correct and up-to-date information to do this. Whatever the size of your firm, you should frequently get data on your financials — debtor books, budgets, and cash flow forecasts should all be readily available.
If you do not already have one, you should consider investing in accounting software that provides this information in real-time.
2. Diversify to combat seasonality
All firms have varying amounts of revenue and expense, which may wreak havoc on cash flow if not handled effectively. For firms whose demand for products and services is seasonal, this often implies that their highest expenses occur during their slowest time. And yearly highs and lows influence more than just Christmas cracker and Easter egg manufacturers.
On the other hand, diversification should be carefully designed to complement rather than dilute the company model.
3. Implement debt collection processes
Credit control and debt collection are critical components of effective cash flow management. According to PricewaterhouseCoopers (PwC) study, almost one in five businesses see current debt levels as the single greatest danger’ to survival. Julian Roberts, director of PwC’s receivables management practice, advises, ‘It’s a good idea to arrange the debt collection process.’ He suggests that follow-up calls be made after a certain period, that invoices be reissued a limited number of times, and that if that fails, a more severe course of action is taken. The longer a loan is unpaid, the higher the interest rate. difficult it is to collect.
‘If your clients have 30-day payment terms, someone must contact on day 31 to inquire about the status of the payment. If you don’t do that, your position rapidly deteriorates,’ according to Jeff Macklin, co-author of Finance on a Beermat.
4. Recognize your consumers’ payment cycles
Given that many of your customers will pay bills every month, it’s a good idea to include this into your credit management system. Otherwise, if you miss a customer’s check run, you may have to wait an additional month, which would harm your cash flow.
5. Work with consumers to establish payment options.
Now that you have a firm grasp on your clients attempt to arrange an early payment plan if feasible. This will enhance your cash flow since you will get payments sooner than planned. You might always consider giving incentives; for example, you could provide a discount if a payment is paid in full immediately. Develop strategies to encourage your customers to pay early; after all, you know them better than anybody else; it’s OK to be cheeky sometimes.
6. Provide correct invoices
According to PwC research, around 85 per cent of the reasons stated by company clients for non-payment relate to invoice questions or inadequate administration. It’s critical to correct the fundamentals, such as invoicing the correct amount and delivering it to the correct location.
7. Enlist the assistance of a third party to recover your debts
If everything else fails and your cash flow is being harmed by substantial sums of cash being held as an unpaid debt on your books, consider outsourcing the process to a collection agency. Despite its mixed image, the Credit Services Association (CSA) trade association reports that its members recover up to £5 billion annually. ‘Do not choose a collection agency solely based on its listing in the Yellow Pages. ‘Use one that you are familiar with or has been suggested to you,’ Macklin suggests.
8. Credit history of the customer
Credit checks on consumers are a smart idea in advance, and you should continue to monitor their payment behaviours during your business partnership. One method is to acquire credit bureau status reports. These contain complete customer information and financial outcomes and information on other suppliers’ payment history, county court judgements, and a suggested credit rating. Finally, Roberts of PwC cautions organisations against throwing good money after bad. ‘If they are a good purchaser but a lousy payment, you must decide whether to continue doing business with them.’
9. Develop positive ties with suppliers
Never underestimate the strength of human connections. Cash flow may benefit from positive working connections, particularly true if there are any future concerns. And, once again, negotiate favourable payment terms with a supplier, develop a positive working relationship from the start, and you will ultimately be able to bargain for a credit account. This will benefit your cash flow since you will be paying for your charges a month after receiving the merchandise. When the timing is right, people may be understanding, so never be afraid to address issues with your supplier that will benefit both your company and theirs; the more you expand, the more work they will get from you.
10. Conduct an audit of your payroll system.
It’s worthwhile to invest some time in determining the finest payroll solution for your particular kind of company. The two primary alternatives to consider are as follows:
- New payroll software – especially cloud-based software – that includes automatic payslip generation, internet access for your team, salary reporting, and frequent updates on legal compliance concerns
- Outsourcing payroll – an opportunity to hire a bookkeeper or contract with a targeted group of professionals who may be able to uncover cost reductions you hadn’t considered.
Any enhancements to your present system might result in a major alleviation of cash flow constraints caused by regular payroll pay cycles.
11. Unambiguous terms and conditions
If an agreement to terms and conditions is included in the basis for any contract, it minimises misunderstandings and increases your capacity to recover any unpaid balance later. ‘Make it obvious that you’re not simply selling something; you’re also agreeing with the customer on how and when he’ll pay for it,’ Macklin advises.
12. Cost-cutting and payment spreading
Simply said, you may enhance your cash flow by avoiding purchases that are not business vital and spreading payments rather than deducting a big amount from your cash flow. These days, hire buy, and leasing may be used to finance a wide variety of commodities, including new and used automobiles, light commercial and heavy goods trucks, plant and machinery, office furniture, and computer equipment.
Additionally, you should analyse every other part of your supply chain to verify you are getting the greatest value.
13. Distinguish your products and services
While many companies see a rise in product inventory while experiencing a drop in cash flow, bartering enables you to convert your excess capacity or inventory into value by providing your firm with buying power when it is needed.
14. Make a financial investment in your firm.
By improving your business’s abilities, production, and promotion, you will enhance your cash flow. This will assist in simplifying how things function successfully, and although you will be investing in talent, you will be enhancing how things are done. As a result, either less time will be spent, or other means of accomplishing tasks will be introduced, speeding up the work process. Whether it’s a more efficient workflow or a more effective marketing plan, the end aims to reduce expenses while boosting revenues. Investing in your own company is a proven method of increasing cash flow that should not be neglected.
15. Conduct a customer audit
A careful examination of your consumer base may be beneficial. If your firm relies on a few major clients who want longer payment terms (and cheaper rates) due to their buying power, refocusing your business on smaller customers – who are often better payers – can help you prevent future cash flow concerns.
16. Factoring invoices
Another way to manage cash flow would be to get an invoice financing arrangement. While there are expenses involved with this (fees and interest charges), the opportunity to borrow cash against future invoice payments gives you more control and flexibility in managing your financial situation.