In the end, all the forecasts and accounting programs in the world are no compensation for getting more cash in the door. Here are some tips on how to improve your business’s cash flow.
1. Set your credit terms carefully
The need to extend credit to customers is a fact of life for most businesses, but it is important to set clear limits. Carefully research the standard credit period for your industry and make an honest assessment about the consequences of shortening your credit terms. Reducing your payment period from 90 to 60 days might lose you one customer, but if the other 99 will pay more quickly it could be worth it.
2. Make your debtors pay quickly
It is vital to master the art of debtor management. One suggestion is to ensure debtors know how much time they have by sending payment notices on different coloured paper – with 30 days to go, send a blue notice, 15 days an orange notice and bright red when payment is required immediately. Talk constantly with major debtors as payment deadlines approach, and perhaps pass by; the squeaky wheel often gets the oil. A small discount for early payment can also provide an effective incentive to put that cheque in the mail.
3. Pay your creditors slowly
No one ever said business was fair. Take advantage of credit terms where you can and prioritise costs according to the severity of the consequences for not paying. Wages, taxes and direct debits are at the top of the list, key suppliers second and everyone else last.
4. Smooth out the lumps
Know when lean cash flow patches are coming and plan accordingly. It is invariably more difficult to get debtors to pay at BAS time and over Christmas, so make sure you have a bit of leeway in your cash accounts to pay wages and other inflexible expenses during these periods. Equally, avoid funding major purchases from your business’s working capital unless you are sure you have the cash to cover it.
5. Use finance products effectively
Overdrafts, premium funding, lease facilities and cash flow funding products can all be excellent tools to help match a business’s cash supply with planned outlays if used sensibly. Even the business credit card can be a good way to ease the squeeze as long as you are sure the debt can be paid before interest kicks in.
6. Do not incur penalties
The Australian Taxation Office and the Australian Securities & Investments Commission both impose penalties for late lodgements or payments in some circumstances. Paying these debts first will save you money and stress.
7. Keep your hands out of the till
Discipline yourself to make cash drawings only in line with conservative cash flow forecasts. Cash drawings are effectively just another expense for your business and should be treated accordingly.