In business, you should never lose sight of the old adage: cash is king. You may be forecasting large profits in the coming couple of years, but you need to have the cash to cover your expenses during this time, otherwise the profits will never materialise as your business disappears. As a result, your business needs its cash flow to be healthy. Here are some effective ways to improve yours.
- Conduct a Cash Flow Analysis
It’s rare that a business has equal revenue throughout the full 12 months of the year. For example, florists tend to have large peaks around Mother’s Day and Valentine’s Day, whereas many retail outlets will have their best months in November and December as part of the Christmas rush.
By conducting a cash flow analysis, you’ll be able to clearly see the cycles in your business and highlight areas where you may feel the pinch. This can help you premeditate any cash flow problems that may occur, helping you head them off at source.
Here, if you’re experiencing lulls, then it could also be worth considering why your business isn’t selling in those periods. Then you can try turn those troughs into peaks, too.
- Shorten Your Invoice Payment Terms
If your analysis shows cash flow problems, then shorten your invoice length. Some invoices allow up to 120 days for payment, and there’s no reason why this can’t be shortened. Any step you take to shorten this repayment period will boost your cash flow.
Send out your invoices as soon as your goods are delivered and ask for payment within 30 days. If companies are willing to pay earlier than this, you could even offer them a small discount.
- Arrange for an Emergency Line of Credit
Loans for small businesses can be extortionate, and you only want to use them in the worst case scenario. Both of the above examples should improve your cash flow, but it’s always wise to have a ‘plan B’ in place.
Arranging for a line of credit is far simpler and more efficient than getting a loan in a hurry and the rates are far more competitive. Plus, you’ll only actually pay interest on the amount you borrow. But, crucially, by arranging for a line of credit before you fall short, you’ll make sure you’re prepared.
There is also, however, an extra point to consider here if you don’t want a line of credit. If your problems are caused by customers not paying, then something like invoice financing may be more useful as you can receive 90% of your invoice value within 24 hours. This way, you get an instant cash injection with a small fee instead of interest payments over time.
You’ll just have to decide which technique suits your needs best.
Follow these three tips and you should have no problems improving the cash flow of your business.