Without good cashflow, a small business is doomed. Good cashflow in the current economic climate is even more important. An otherwise sound business venture can be trading on borrowed time if its owner does not understand just how tightly and effectively cashflow must be managed.
One key ingredient is the principle of peak cashflow. This is understanding how, at certain times of the year, and even at certain times within a month, the flow of cash into the business can ebb, if not dry up completely. Being prepared for this eventuality is what can make the difference between a business staying afloat or going under.
The business owner who gets this right can plan ahead so that finances can be balanced, and banking and credit facilities can be geared to cope.
The cashflow killer:
Late payments are the curse of the small business owner, especially if payment periods extend to 90 days, as is more common since the recession. This clearly has a knock-on effect on cashflow, because the small business owner also has bills to pay, but these may not afford the same 90-day grace period. Where possible, however, that is exactly what the business owner must strive to achieve – deferring his or her own outgoings to more evenly match the cash that is physically coming into the business.
Slack banking habits must also be avoided. All money coming into the business must be banked as soon as possible. A cheque sitting on the desk may count as paid, but it will have no positive effect on cashflow until it is in your business account.
Ideas to increase cashflow:
Make certain that requests for payment are clear and that your business banking account details are plainly understood. Offer as many ways to pay as possible to facilitate the customer’s ease of payment.
If possible, delay large business purchases until one of your historically better cashflow periods.
Keep a single dedicated business account.
Talk to your bank about setting up a special overdraft facility to easy cashflow worries and carry you through the tough times.
Make use of your own interest-free credit period by using a business credit card rather than petty cash. Just make sure you keep track of purchases so you don’t get a nasty surprise when the statement arrives.
Offer incentives to customers to pay early, such as discounts for those who pay within 7 days, or even within 30 days – no matter whether you believe this should be the norm.
Charge late fees to customers who exceed your mutually agreed payment period.
Consider legal advice if payment periods are being routinely flouted.
Do a background check on new customers to ensure they have no troubling credit history. If necessary, request references.
Send out invoices the same day as the product, not weeks later, and never send out new product to customers who are not up-to-date with their payments, however good their sob-story sounds.
Try not to hoard inventory unnecessarily. Product sitting on factory shelves does nothing for your cashflow.
As a last resort, consider selling your unpaid invoices to a debt collection company. You will get a reduced figure, but if it makes the difference between continuing to trade and liquidating the company, it might be worth doing.
This article was written by Jeremy Cabral who is a regular writer and part of the team at Credit Card Finder, a 100% free Australian credit card comparison and application service. Visit the Credit Card Finder website for more information on the available Business Credit Cards, or Subscribe to their RSS feed for more practical articles.
- Is Commonwealth Bank listening? Commonwealth Bank has been working on its customer service, and I’ve noticed a few things: 1. Their online banking rocks. I recently had to use my partners online banking (Citibank) to try and find the interest on her accounts for last financial year – not...
- The Best Credit Card Loyalty Programs for Your Small Business Small business owners need fast access to a credit line when they need to purchase office supplies, inventory or travel. With a credit card that has a loyalty program, you can recoup some of your business expenses, giving you more money to put back into...
- Is it time you re-thought your savings strategy? Just how quickly the economy will recover is not yet clear, but tough times have turned many people’s thoughts to their savings and whether they would have enough to support them through a prolonged downturn or, in the worst case, in the event they’re left...
- Why Do You Need a Personal Loan? A personal loan may seem like an outdated financial product, especially with the prevalence of credit cards growing ever stronger. However, the benefits of a personal loan can often suit your needs better than a credit card, and you may be eligible for a personal...
- Twitter on your mobile Roy Morgan statistics (March 2009) indicate that the use of social networking sites on mobile has grown 125 per cent over the past six months, amongst Australian consumer mobile users aged 14+. “The social networking community is not longer satisfied with logging on once a...