Business health is all about your cash flow. If you don’t have a healthy cash flow, you’re not going to be able to run your business smoothly or invest in business growth.
So to stay healthy, you just have to ensure more money is coming in than goes out. Seems simple enough, right? Well, maybe not.
This article presents five tips for ways you can improve your business' cash flow.
Leasing
Leasing usually works out more expensive in the long run, so it often gets a bad rap. But leasing can be a good option when cash flow is tight. Small, regular payments are much gentler on your cash flow than the lump sums needed to purchase real estate, equipment or supplies.
There are two types of leases, being operating leases (i.e. renting) and finance leases (i.e. paying off the cost of asset over time). Each has slightly different tax treatments - but generally the cost of a lease can be claimed for tax purposes one way or another.
Unless you have the capital available or can secure cheap debt, then leasing can be a better option for your cash flow.
Enforce payment discipline
It's essential that you stay on top of your receivables. Make sure you have a good collection system and don’t wait until payments are 90-days outstanding.
This is about how quickly you’re paid. It’s also about your customer service. Are you quickly identifying and resolving disputes? It’s frustrating when there’s an issue with a service or good you’ve paid for, so impress customers with quick solutions.
Payment discipline is also about how you pay others. Don’t miss discounts or get into a routine of paying late, as this can you hurt you later. Build a positive relationship by paying on time and you might be able to negotiate a better deal in the future.
Evaluate Your Terms
Have you put your supplier terms and customer terms side by side? Chances are, they don’t match up. If you have to pay, on average, every 20 days and you expect to receive every 30 days, you’ll need to have sufficient capital to fund that gap in between.
Check that the terms you offer actually work for your business, and see if customers are meeting those terms. Do the same for suppliers – how do their terms compare to their competitors’? Check for early payment discounts, even though it shortens the gap between receivables and payables. The discount may be worth it.
Re-evaluate product pricing
Working out the best price for a product is another balancing act, and may involve trial and error. If you price too low, customers will suspect poor quality and won’t take you seriously. If you raise your prices too far, your customers will look to your competitors.
There is a middle ground. When you increase prices, they’re perceived to have a higher value, drawing in some customers. Find that happy middle, where your cash flow is boosted without losing sales.
You’re not a bank
Don’t harm your company’s financial health by giving handouts to others. If your payment terms are too long, you’re effectively giving interest-free loans to others, while struggling to keep your cash flowing. Minimise long term payments – think about eliminating them.
And be proactive. Perhaps you can ask for a deposit upfront or full payment in advance. Find out customers’ payment policies before you agree and make sure the terms work for you. If a customer is a regular late-payer, send an early reminder before payment is due, and follow up promptly.
Don’t let your cash flow slow to a trickle – or run dry. Whether you’re struggling to meet payments or to collect from customers, follow these cash flow tips for your business’ health.
