Having a healthy cash flow is vital for any small business. Cash is king when it comes to succeeding in the business world and can represent the difference between success or failure.
The way to get a healthy cash flow relies heavily on the word ‘flow’ and revolves around a cycle. Businesses need to carefully balance the amount of funds coming in and the amount of funds going out. The golden rule is to have more money coming in that going out.
This may sound simple but cash flow is one of the biggest challenges for small businesses who are owed, on average, nearly £12,000 in outstanding invoices, according to Sage research. To add to this, nearly two thirds of businesses (60%) are waiting 60 days or more to receive payments and spend an average of 350 hours chasing late payments every year.
Presented with these challenges, it’s not surprising that so many businesses struggle to get a healthy cash flow. Here are a few tips that could save your business in the future:
1) Know your customer
Knowing who your customers are, what they are interested in and why they are buying from you is the first step to understanding where your funds are coming from and how you can use them to invest in your business. Learning what funds your customer has coming in and out each month and when their payments are due is also helpful. This is a neat trick to avoid late payments by arranging payment dates that will best suit you as well as your customers and suppliers.
2) Prepare for the worst, hope for the best
In an ideal world, your business will run smoothly. However, there are likely to be times when unexpected issues occur. To prepare for these times, make sure your clients and suppliers know that they can trust you to ensure that their investments are in good hands. Having credit insurance in place is important, insurance companies and brokers will offer tailored credit insurance to help you when customers miss payments. By knowing specific details about your customers, you can assess whether they are likely to fail and if they are a risk to your cash flow. Don’t let your customers’ failures lead to yours.
3) Know your payment dates
With small businesses owed an average of £12,000 in outstanding invoices, knowing your payment schedule is key. It’s important to agree terms in advance with companies you are reliant on. Simple tips such as making payment dates clear in invoices and having a written and signed payment contract are essential to ensuring that all parties involved understand the payment schedule.
4) Treat your suppliers right
Treat your suppliers how you would like to be treated. Suppliers will experience the same effects of late payments as you so ensure you pay them on time. Late payments can damage your relationship and could bring a partnership to an end. To avoid this, ensure that your payments are on time and in full to maintain a happy working relationship. Being known as a business to rely on will help you in the future and could even lead to better price negotiations and priority on your orders.
You can find more tips to help you become a cash flow pro here: Manage your cash flow better with Sage One Accounting software.