Cash flow management is one of the most challenging tasks for small business owners. Having to continually nudge customers for payment uses up valuable time and can be disheartening. If you're tired of being on the roller coaster ride of chasing payments from customers, consider these tips on how to help improve cash flow in small business.
1. Use a software tool to stay on track.
Tracking your available cash and anticipated inflow and outflow of money throughout the month can be a vital step in managing your cash flow but it can be time-consuming for a busy business owner.
You can make it easy for yourself by using one of the many online cash-flow management tools such as Float, Pulse, UpYourCashFlow or Cushion, to name a few. You can do a search to find one that works best for your budget.
Having a bird's eye view of cash-flow issues is one of the first steps in how to help improve cash flow in small business
2. Expand payment options for customers.
When you examine how to improve cash flow in small business, you may want to focus on speeding up the process for customers to pay you.
For one thing, you could offer more payment options by accepting credit cards, debit cards or automated clearing house (ACH) payments. Consider as well digital wallet or mobile payment solutions such as PayPal, Square, Apple Pay, Venmo or even Bitcoin.
The more convenient you make it for customers to pay, the faster it might be to get the cash in your account.
3. Match receivables to payables.
An oft-forgotten aspect of how to improve cash flow for small business is to look at the payment terms for your suppliers and compare them to the payment terms for your customers.
If you're required to pay your suppliers within 30 days but you allow customers to pay within 45 or 60 days, you're creating a gap in cash flow. When considering how to improve cash flow in small business, that's an important area to focus on.
Consider matching the supplier terms of payment to the customer terms of payment, if possible. What penalties do your suppliers charge for late payment? You might be able to do the same for your customers' late payments. Late payment charges may be an incentive for customers to pay on time, just as it's likely to be an incentive for you to pay your suppliers on time.
4. Consider factoring your unpaid invoices.
If your business is growing rapidly and you're concerned about meeting your overheads, you may want to explore factoring your unpaid invoices as a potential, short-term solution to cash-flow problems. (The dictionary defines factoring as "the business of purchasing and collecting accounts receivable or of advancing cash on the basis of accounts receivable.")
Factoring works this way: Once you issue an invoice, a factoring company pays you a percentage of the account receivable (generally 70 to 90 percent), so you don't have to wait to get paid by the customer. The factoring company takes on the responsibility of collecting the money from the customer.
Invoice factoring can help improve your cash flow and free up the working capital needed to run your business. As with any such financing transactions, be sure to seek professional advice to determine if this is a suitable option for your business.
5. Pick up the phone.
An overlooked aspect on how to improve cash flow in small business is the human touch. If you've tried to send email reminders or automated electronic reminders to customers whose invoices are past due without much success, consider picking up the phone.
Email can be distancing, but hearing your voice can add a personal touch. It can remind customers that the business that has provided them with the services or goods has a human face.
6. Stop acting like a bank.
Are you extending long payment terms or allowing too many customers more than the standard 30 days to pay for your goods and services? You may be causing a cash-flow squeeze that could ultimately hurt the financial health of your company.
Think about doing an audit and resolving to minimize or eliminate long payment terms altogether. Some large enterprise customers may delay payment to finance their own cash flow. Rather than getting a loan from the bank, a company can essentially get an interest-free loan from their suppliers by delaying paying the bills for 60 or more days. Consider finding out the customer's payment policy at the start of the contract and discussing the terms to make sure their policy works for you.
For those customers who may be habitually late in paying, consider sending a reminder a week before. Follow up promptly with them as soon as you know they missed the payment deadline. Depending on the nature of your business, you can also ask for a deposit upfront and full payment seven days before you deliver the goods or services. Protect yourself by being proactive while preserving the relationship with the customer.
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