Cash Flow Management Tips For Small Businesses
Posted by: Brookside Admin
When talking to local business owners, one of the biggest challenges they cite is poorly managed cash flow, which significantly hinders growth among other things. In many cases, the failure of a business can be directly attributed to an issue with cash flow. Thankfully, there are many ways to ensure your business doesn't encounter these same problems. Here are a few actionable tips for managing your business's cash flow.
- Avoid delayed payment
In some cases, you may feel you don't have much control over delayed payments. Particularly if you government agencies or large corporations, delays in payment are seemingly unavoidable. But, by developing stronger relationships with your customers and keeping the lines of communication open you can minimize this issue. This could include offering a discount for certain payment methods, paying a large balance in full or paying upfront. This likely impacts your margins, but it's typically worth it as your business grows. Before starting a long-term project, it's also a good idea to require a deposit before work begins. And, regardless of what your specific policies are, be sure to clearly communicate those in writing to customers. This includes touching base with them before and after invoices are sent out to ensure there are no disputes.
- Optimize and diversify inflow
In addition to getting fewer delayed payments, it's also important diversify the way your clients pay in order to avoid disastrous outcomes like one of your largest clients going out of business before paying a sizable bill. You can break down payments into more palatble portions so that you're never stuck waiting on a large percentage of your income in one lump sum, but many businesses find that it's a better option to offer different services that earn more monthly income. For example, the service as a solution model, or SaaS, can serve as a supplement to larger contract work to provide a regular influx of cash each month. This way, even if a payment is delayed, you still have plenty of cash on hand.
- Reduce outflow
In order to have more cash available, you need to spend less. That's not exactly rocket science, but this simple strategy is often overlooked. Reducing expenses isn't always easy, especially for young businesses. New equipment, staff and other bills often seem like a necessity. It may seem risky to open a line of credit, but it takes the stress of your business when you absolutely have to make large purchases because you can pay gradually over time. By carefully managing your cash flow, it becomes easier to say no to excessive spending because you always know exactly how it will affect you.
- Collections policy
As much as you try to convince customers to pay on time, there will be situations where you need a collections or late fee policy. This will need to be communicated to the customer as they approach deadlines and as they pass them. In addition to having these policies, you need to have a means for collecting the money and fees you're owed. Negotiations are always an option, and it can be tricky to navigate collections if you're trying to keep a good relationship with the client, but it's important to have a plan for this outcome before you need it.
At Brown Kinion and Company, we help local businesses manage their cash flow with services including collection and payment policies, obtaining lines of credit and maximizing the rate of return on idle cash. Contact us to learn more.