For many businesses, it is not a lack of money that is a core problem; it is poor cash flow. The funds are not coming when you need them, and this hinders growth. Like most business problems, owners are hoping for a quick fix, but when it comes to improving your cash flow, it will take some diligence and effort.
You need to carefully examine your current practices and commit to making the changes that will bring the desired results.
Here are just a few ways your small business can combat this common problem:
Get Accounts Receivables In Order Having
Worked for a collections agency in the past, I saw firsthand how terribly many businesses managed their accounts receivables. Considering the importance of customer payments to a business’s success, this always surprised me greatly.
If your accounts receivables are in disarray, this is first area to tackle. If you are invoicing in batches, stop it; get each invoice out as soon as the goods or services have been delivered. Offer early payment incentives. Maximize payment options so it is as easy as possible for your customers to pay you. If you do not have a solid process in place for dealing with past due invoices, get one.
Yes, it is uncomfortable to approach customers about late payments, but you deserve to get your money in a timely fashion. Businesses that follow up right away get priority over the ones who will not come knocking until a few weeks out when it comes to clients who are in a financial bind.
Don’t Pay Bills until They Are Due Unless
You are getting some sort of incentive for early payment that truly benefits your bottom line, there is no need to pay off bills before you have to. You are letting go of cash that could be put to better use elsewhere. This can be a tough one for people—unpaid bills just sitting there can really eat away at you. It feels good to get it taken care of ASAP. There is certainly some benefit to this approach, but if you are experiencing cash flow problems, it may not be the best tack.
While on the subject of paying vendors, there are a couple of other approaches that may help. Using a credit card or business line of credit to handle bills is great, provided you are disciplined in paying off the charges. Approach your vendor about extending payment cycles.
Examine Cash Flow Issue in Segments
If you look at your cash flow problem as a whole, it will be difficult to make any decent headway. You will feel overwhelmed and continue as you are without making any truly effective changes. To best get a grasp on the situation, segment your customers, suppliers and inventory, and look at each on its own.
When it comes to inventory, is a lot of your money tied up in items that only sell sporadically? Would you be better off focusing on just the items with a high turnover? As for your suppliers, distinguish between the regulars and those you only use occasionally.
You will likely be more successful in negotiating different payment terms with those you work with regularly. Take a good hard look at your customers, their terms and how well they adhere to them. Identify any issues and decide how you can best address them.