Recently at The SME Centre of Excellence, we were posed a question by one of our connections through our #ContactChris feature who asked us “How can I improve my cashflow?”.
Cash flow is important to all businesses – irrelevant of size, although smaller or newer businesses are especially susceptible to cash flow issues in the first year as you build your cash inflows. Typically, at this stage, the focus is usually getting cash into the business rather than looking into systems around the actual management of cashflow.
Research from the Asset Based Finance Association (ABFA) found that clients of small companies take on average 72 days to pay an invoice, with micro-business owners waiting six weeks longer to be paid than larger firms. 70% of small business owners cite cash flow problems as the biggest threat to their company, with late payment being one of the most common causes. So, what can be done?
The best way to think about cash flow is to speed up your cash inflow and slow down your cash outflow, but always operate within a fair and legal framework – you don’t want to be knowingly causing others cashflow issues either!
We are all looking for ways to streamline business processes – and considering how you increase the speed of payment with your customers should be no different. There are many ways you could look to implement improving this, but some simple methods, especially for smaller businesses, you could use to achieve increased speed on your inflow might be to:
Issue the invoice as soon as the work has been delivered – many businesses wait until the end of the month to issue invoices in a batch
Chase the customers that have not paid
Change your payment terms to a reduced timeframe on your invoices (typically somewhere between 10 and 21 days works best)
Offer a slight discount for early payment – i.e. 2% 10, Net 21 works pretty well (offering a 2% discount on less than 10 days or Nett amount on 21 days)
Make it easy to pay – i.e. offer a wide range of payment options
Have a clear plan in place for dealing with late payments.
If you’re looking to slow down your outflow you might wish to consider:
Talking with your suppliers to see if they will accommodate an extended payment window (without penalties)
Discussing with your supplier breaking down possible payment terms over a couple of months if you are facing a large invoice
Avoiding excess inventory or stock purchasing
Taking a look at how you might control your spending internally – i.e. can you spot anywhere where you can save money by changing suppliers for example.
Being focused on your cash in and out will absolutely support the development of a sustainable and growing business.