There's a reason they say cash is king: it keeps your business afloat and funds growth. Here are nine simple tips for improving your cashflow.
Cash flow picture from Shutterstock
As you read this, you've probably got a pretty good idea of how much money is in your small business bank account. But do you know what your bank balance will be next week? Or next month? If you don't, how certain are you that you'll be able to pay the rent and wages, and meet your business bills when they are due?
A lot of small businesses focus on profit, but cashflow — how much money is flowing into and out of the business and when — is just as important. In fact, sometimes businesses go broke because cash hasn't come in quickly enough to meet their bills, even though overall they're making a profit.
There are some relatively easy ways to improve your small business cashflow.
Know where you stand
First up, you need to do a cashflow forecast to get a clear picture of your cash position in the coming weeks and months.
This can be complicated; you might want to get some help from your accountant if you haven't done one before. Accounting software helps by giving you easier access to past financial data, which can be used to work out how much cash is likely to come into and out of your business in the future.
Get your invoices right
Issue invoices as soon as you've finished a job, and make sure you include all of the relevant details your client will need. You don't want to give them an excuse to send your invoice back in two weeks asking you to redo it.
Make it easy
You want to make paying as easy as possible so customers can do it as soon as they get your bill, instead of putting it off. Offer a range of payment options — eftpos, credit cards, direct bank transfer and BPAY.
Change your terms
Use an accounting software solution (like Xero) to look at average debtor days: how long on average it takes for customers to pay you. You should try to keep your average debtor days close to or below your payment terms, because the sooner the money comes in, the quicker you can start using it in your business.
Data from Xero customers shows that SMEs using online accounting get paid more quickly - 32 days after invoicing their customers, down from 51 days in 2011.
Online invoicing allows small business owners to see if invoices have been viewed, send invoices from a mobile device, and, via automated bank feeds, regularly check their bank account balance to stay on top of collections.
If it's taking too long to get paid, you might want to adjust payment terms; for instance, by bringing them down to 14 days from 30 days.
Offer discounts for prompt payment
You can give customers an incentive to pay more quickly by giving them a small discount — such as 5 per cent — for paying you on time. Depending on your business, having the cash available sooner to buy stock or pay wages could be worth more than the small amount of foregone revenue.
Quickly follow up overdue accounts
The longer you leave an overdue account the less likely it is you will get paid, so start chasing up accounts the moment they become overdue. Send a polite email reminder, then follow up with a phone call. If you feel awkward ringing customers asking for money get someone else like a business partner or your spouse to do it for you.
There are some clever add-ons that integrate with Xero and other packages to take the hard work out of chasing debtors for you. These are low-cost solutions that send out automated invoice reminders and track collections to help save time and boost cash flow.
Talk to your bank and arrange a loan facility. Even if you don't draw on it now it's a good idea to be able to borrow money when you need it to help meet some sudden expenses during a cashflow squeeze. If you leave it to the last minute and show up at the bank desperate to borrow money, it is less likely to help you.
Talk to your suppliers
If you're struggling to meet some of your bills because you're waiting for cash to come in then give your suppliers a call and get a few extra days to pay them. As with the bank loan, don't leave this to the last minute. Suppliers are much more likely to be helpful if you warn them ahead of time rather than if they have to chase you up for payment.
If you follow these nine tips, you should be able to make sure that your small business never has to scramble for cash again.
Chris Ridd is managing director of cloud accounting provider Xero Australia. Follow him on Twitter @Chris_Ridd. The information contained in this article is general in nature and does not take into account your personal situation or you business' circumstances. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from an accountant or other qualified professional.