Smart cash-flow management is all about quick collection of invoices and timely payment of bills
Johnny Cash, the famous American country music singer, is not usually associated with startups. But he has wise advice for all startup founders: “Sometimes I am two people,” he once said. “Johnny is the nice one. Cash causes all the trouble. They fight.”
The singer’s observation speaks to the importance of cash. And small businesses should remember it.
Going whole hog for growth without taking care of cash flow can lead to the downfall of your company. You should, however, stop chasing growth if you’re starting to crib when signing your employees’ pay cheques or bills to vendors.
The lack of cash flow is the second biggest reason for startup closures (the first is product failure in the marketplace). According to a study by research firm CB Insights, lack of cash flow causes the untimely demise of 29% of startups. Fortunately, if you recognise the problem, you can deal with it.
Here’s what you need to do to improve cash flow in your small business:
1. Take care of accounts receivable
Are the credit terms for your products or services too lenient? If they are, stop. Try to reduce the accounts receivables cycle in light of cash flow. And if you find this difficult to do, seriously consider differentiating your product in the market so you can charge a premium price. Also pay attention to much you’re selling and whether or not your vendors are paying you on time.
2. Build a proper invoicing strategy
The foundation of successful cash flow depends on your invoicing process, which is often the most painful aspect of running a small business. Create a proper incentive structure for early and late payments of invoices. Try asking for partial payment for your products or services. Or request payment up-front, before selling your product.
This simple strategy will reduce most of your cash-flow headaches. Offering discounts to customers that paying early or make a partial payment can keep your cash-flow register ringing. Similarly, penalising for late payment might discourage some vendors from paying late.
Many businesses send invoices at the month end. Because of that many vendors don’t get sufficient time to have a look into it. Send your invoices as-you-go. This’ll give your vendors more time to understand it. You’ll have more time to send early reminders to them. Give your customers opportunity to check it properly.
Also read: How to successfully steer your SaaS business in a tough environment
3. Cut fixed costs
Fixed costs can be a drain on small businesses. Moving out from a swanky business office to a shared workspace could help you save capital for a rainy day. Building a partly remote team may also help you cut the requirement for premium office space. You can also outsource non-critical work to a suitable offshore location. The idea behind all this is that you should always be thinking of creative ways to reduce fixed costs.
For instance, many startups use a virtual office address in a prestigious commercial tower in San Francisco, but their employees actually work at a remote location.
4. Identify bottlenecks
Do you have a recurring issue with cash flow? Is there a customer who always delays their payments? Once you identify such problems, you can easily deal with them. A habitually late payer should be warned that they risk incurring a hefty fine for late payment. You can renegotiate the terms of your contract with them to change their payment behavior. All of these tips are simple, but they work like magic to improve your company’s liquidity.
5. Put some cash aside
The problem with seasonal businesses is that they’re awash with money in the peak season. That’s when they make most of their sales. But saving cash to cover employee salaries during slow times is a good idea. For instance, most businesses in North America earn a lot just before Christmas. Putting aside some extra cash for employee wages or vendor payments in January, after the Christmas break, will be helpful.
On a final note, smart cash-flow management is all about quick collection of invoices and timely payment of bills. Create a cash flow strategy for invoicing, receivables, and more efficient budgeting. You have to base the strategy on your business’s unique circumstances. Be creative–and yes, automating things might solve a lot of problems.
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