Many small-business owners have indicated they are going to be spending more money this year than last. If you are one of them, be sure you do so wisely. Keep on top of your finances and manage your cash flow effectively. Here are ten tips to help you plan, monitor and improve your cash flow.
1. Prepare and maintain a cash flow forecast
Carefully map out your expected cash in and cash out on a spreadsheet that shows your upcoming projected cash flows month by month. Include all known receipts and payments and set realistic targets for amounts that are uncertain.
2. Check creditworthiness
Before providing credit, ensure that the customers completes and signs a standard credit application form. Follow up on references, check the website and obtain a credit history report from the likes of Veda or Dun and Bradstreet where this warranted.
3. Agree your payment terms and stick to them
Your Terms of Trade must accompany the credit application form and establish clear payment terms from the outset. This will help you to know when you are going to get paid. It also determines when a payment is overdue, so you can follow up promptly. Stick to your guns. There is no point in having payment terms if you are going to ignore them.
Reduce the number of credit accounts you offer. Where possible, avoid extending credit at all. Try to get payment straight away and eliminate all subsequent credit problems. This is not unusual when dealing with individuals instead of with larger businesses.
Although it has been traditional in New Zealand for standard payment terms to be the 20th of the month following the invoice, this does not need to be the case. For new credit customers, establish the terms as payment with 7 days. For existing customers, make sure that your credit application makes provision for changes to the terms and that you comply with any stipulated notification requirements. For example, advise customers well in advance that from a specified date, payment terms will be 7 days and ask them to contact you if this will be a problem. Larger businesses may not accept the change in terms, but many of your customers will.
4. Invoice promptly
Some factors that influence cash flow are in a business's own hands, including when to invoice. If you are in a trade, ask your customer if they are happy with the job. When they say "Yes", give them the invoive. You'll be surprised how many reach for a wallet or cheque book. If you wait a few weeks before invoicing, don't be surprised if your customer takes weeks thereafter to pay.
If your terms do require payment on the 20th of the month following the invoice, make sure your invoices are prepared before the end of the month, or you may have to wait another month for payment.
5. Make payments easy for customers
Making payments should be as easy as possible for your customer. Online banking is the best option. Not only is it safe and easy now, but it is efficient both for the person making the payment and for the recipient. Make sure that your bank details are very visible on your invoice, together with a request for prompt payment, consistent with your terms.
Accepting credit cards is a way of allowing your customers to choose a credit option while leaving the risk with the credit card company or bank. There is a cost, but payment is assured
6. Offer fixed payment packages for regular clients
One way that SMEs can ensure good cash flow is by offering periodic payment packages. This tends to work when you provide a regular service and tend to bill monthly. For example, music or language tutors, fitness instructors, or consultants whose services are in high demand and short supply.
Rather than charging regular customers an hourly rate in arrears, establish a retainer package for a fixed number of hours each month, which you can bill in advance. Get your clients to set up an automatic payment. This will guarantee your availability for them and you will be paid up front. You can plan your spending and business growth more easily and have peace of mind.
7. Use technology to manage cash flow
The best way to get paid promptly is to ensure you have good systems in place that increase the cash flow into your business and minimize your risks. Technology can make it much easier to manage cash flow.
Your systems should be able to show you quickly and easily what has come in, what is outstanding and what is overdue. They can also help to ensure that all of your payments to creditors are made on time, but no sooner than they have to be. Cloud based accounting can save time and allow you to view your accounts on the move via your laptop, tablet or mobile phone and keep up to date with your financial position wherever you are.
Email invoices to customers if possible. Again, make sure that your bank account is clear, but also able to be copied and pasted into an online banking application.
8. Train an employee to help you manage your cash flow
Some small businesses allocate a dedicated person to monitor the money going in and out. As part of the job spec, the person keeps a close eye on daily receipts and payments to ensure there is always sufficient cash in the bank. When debtors are late with payments, they are phoned and reminded to pay. Confirm when payment will be made and note this in the system. If the time comes to hand the debt over to a collection agency, the details in the system will help you to recover the amount owing.
9. Keep the bank informed
If you establish a good relationship with your bank and develop trust, they are more likely to look after you when you need their support. So, if you find that you will need to go into overdraft temporarily and are expecting funds in, be proactive and keep them informed, so that they know what is happening. This can also help to avoid nasty surprises for the bank and for you.
10. Prevention is better than cure
When it comes to chasing debtors for money, prevention is far better than cure. Do everything possible first to make sure your debtors' invoices are paid on time and you will eliminate later costs and problems.
Source: Business Advisor: May-June 2014 Issue