Increasing the amount of cash you have on hand isn’t rocket science. There are basically only two ways to do this: earn more and spend less. However, within these two categories are a myriad of strategies and actions you can take to improve cash flow—to get paid faster and spend slower. Here's how:
1. Stop being a banker for your customers. Instead of invoicing for your goods and services, find ways for customers and clients to pay you on the spot. For example, accept payment by check, credit or debit card or electronic payment. Consider using a swipe device for your mobile phones and tablets, such as Square and GoPayment to process payments on the spot.
2. Set stricter payment terms. If you bill for goods and services, shorten the period in which customers and clients have to pay you. Instead of giving them 30 days, change your terms to 10 days or payable upon receipt.
3. Involve your staff. As a business owner, you can’t do it all. Put your sales force into the game by tying their commissions not to their sales but to collections of sales they’ve made. This will give them incentive to keep after customers to pay up.
4. Pay your business expenses by credit card where possible. This payment method gives you more time to settle your bills without parting with cash. For example, if you pay for a subscription to a business journal by check, cash is taken from your bank account when the journal deposits it. In contrast, if you pay by check card, it could be weeks until you receive and have to pay the credit card bill.
5. Use electronic transfers to make last-minute payments. You can postpone until the payment deadline any cash withdrawals from your bank account by paying bills electronically where possible. For example, you can pay your payroll taxes using the Electronic Federal Tax Payment System. Say the payment is due on the last day of the month. Instead of mailing a check early enough to ensure that it gets to the government on time, which means that the check may be cashed prior to the end of the month, simply arrange for the transfer of funds on the payment deadline.
The same strategy can be used for payments by phone if electronic payments are not an option. For instance, pay-by-phone can be used for most insurance premiums.
6. Delay your payment as terms allow. If you owe money to a vendor or supplier, don’t make a payment before it’s due. For example, say you have 30 days to pay. Don’t send your payment when you receive the invoice; wait until you have to pay up.
Of course, you may want to pay earlier if you’re offered a discount for doing so. Check whether the discount for early payment is worth the impact on your cash flow.
7. Finish your work early. Depending on what you do, payments to you may depend on when you complete a job. The faster you do this, the sooner you’ll be paid. If you have a deadline for completion of a job by the end of the month, finishing a week early means getting paid that much sooner. (This also gives you more hours to do other work for which you can bill.) Of course, make sure that speed doesn’t jeopardize the quality of your performance.
8. Get SAASy. "Software as a service" applications generally charge a monthly fee, like a subscription for your cable TV services. In contrast, if you have to buy desktop software, this entails a large upfront fee, plus hidden charges. The hidden charges include often IT expenses for troubleshooting and data backup costs; these charges are not necessary with web-based applications. Overall, it is likely that moving to a SAAS model will cost you less over time. At the least, it will be easy to project the cash flow need to cover this expense without any unknowns arising.
9. Turn your receivables into cash. If you have uncollected receivables but need cash now, consider ways to transform them into cash. This can be done with:
- Factoring (selling your receivables to a factor);
- Purchase order funding (securing short-term funding based on your purchase orders).
Of course, doing this costs you something. With factoring, you’ll only receive a portion of what you would otherwise have collected on your receivables (in effect you’re paying an interest cost to the factor, who has to wait to collect payment). Purchase order funding involves interest costs.
10. Revise your prices. As your costs increase, consider raising your prices. For example, with high gas prices at the pump, your costs are higher for driving; you may even pay delivery surcharges. Absorbing these higher costs indefinitely will certainly eat into your profit margin, but more importantly will hurt cash flow. If you don’t think your customer base will adapt to higher prices, consider adding a temporary surcharge where appropriate, such as on deliveries.
11. Negotiate everything you can. As a business owner, you are a consumer of the goods and services your company uses. Some things can’t be negotiated, such as workers’ compensation premiums. But for other things, don’t be afraid to ask for discounts, extended payment terms, and other breaks that will help your cash flow.
12. Slash your overhead. Review everything you currently pay for to see where cuts can be made. Assume that nothing is sacrosanct. Do you really need that newspaper subscription when you can read the information for free online? Can you cut the cost of office supplies (e.g., use 50 percent less paper by two-sided printing). Get creative!
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s
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The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.