5 Tips To Avoid Poor Cash Flow In A Small Business
If your business is growing with huge sales and soaring revenue, you know that your business is going in the right direction! But even growing and profitable companies can experience frequent cash flow problems, hampering day-to-day business activities and lowering operational efficiency.
It is suggested that you prevent poor cash flow problems by implementing certain strategies. Some of the best ones are detailed below:
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Focus On Timely Collection Of The Payments
If your debts are due and your receivables haven't arrived yet, you will face cash flow problems. To avoid this, you can use the following tips:
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Be quick in sending outstanding bills. The delay from your side will demotivate the client to disburse the payment on time. The more promptly you send bills, the quicker you get the payment.
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As a routine, keep following up with the clients for the overdue bills.
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One of the wisest things to do is to set clear payment rules, right at the start of doing business with them. You can choose the deadline as per your convenience and business requirements. While some businesses offer their clients 30 to 60 days payment term, you can set a closer payment deadline if you need the money sooner, to pay for your expenses and maintain inventory.
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One of the interesting ways to ensure early payment from the clients is to offer them a discount for timely payment. This proposition excites many clients and they are tempted to make early payments. However, before offering something like this to your clients, check the feasibility aspects.
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Create a list of customer payment dates. Knowing when the client is expected to pay for your product or service will help you with timely payment collection. Also, check the list regularly to avoid missing important client payment dates. Take the help of the best accounting software to generate accurate and timely invoices. The software allows you to create a dashboard that provides a real-time view of everyday transactions. Electronic records are also useful at the time of audit.
Any irregularities or delays in collecting the payment from the client can have detrimental effects on the business. Many studies and researches indicate their due to the poor paying clients; several entrepreneurs had to wrap up their small businesses.
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Forecast The Cash Flow
One of the best ways to avoid cash flow problems is to see it coming. Setting monthly targets and remaining updated on the finances, will prevent any shortfalls.
Most businesses set up a cash flow forecast in the form of a spreadsheet. They jot down their income and expenditures in the document every month.
It is also important to take into account seasonal variations. The electricity bill goes up during winter due to long-running hours of the heating devices. Many more such things need to be factored in. The idea is to include all the fixed and variable costs in the cash flow forecast sheet and plan accordingly.
By identifying potential cash flow problems in advance, you can prepare the solutions. Other ways, such as monitoring market conditions, doing customers' credibility checks, and more, are also suggested. It will help you take timely action. You can also take the help of small business advisory services to deal with these problems quickly and efficiently.
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Efficient Stock Management
Another must-have on the list is a well-managed stock system. It is as important as managing cash flow. The details of what you have in stock and what needs reordering must be at your fingertips.
An efficiently managed stock results in positive cash flow. Since you do not hold too much inventory, you don't have all your money tied up. Optimized inventory means that you should neither have extreme surplus nor too less that it becomes unable to suffice the emergency requirement.
It is a good idea to make separate lists of the fast-moving goods and slow-moving goods. Be cautious of the list of products that do not move at the same pace as other products. They tie up a lot of cash which results in poor cash flow.
Instead of buying more of such products, think about getting rid of them. If the stocks have been lying unused for a long time, and you don't see any chance of them getting sold either, it is better to offer the same at a discount. Seek suggestions from business accountants Perth.
Remember: The secret to a good cash flow lies in identifying how much stock is needed!
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Seek Credit
If you need money to cater to the rising business requirements, it makes sense to access a line of credit. Many ways will help you with a sufficient amount of money to meet your expenses and overheads.
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You can seek a line of credit from a bank or a financing institution like an overdraft or small-business loan. This is a great option because banks are always willing to lend loans to businesses at attractive interest rates. Once you receive the payment from the client, you can clear your loan or debt.
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You can also consider invoice factoring. It enables the businesses to sell their bills or accounts receivable to the factoring company and get immediate cash in return. The factoring company advances more than 90% of the invoice upfront, and the responsibility for collecting payments is theirs. When they get the payment from the clients, they pay the remaining amount after deducting their factoring fee.
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A Good Relationship With The Lenders
Ensure to stay on good terms with lenders. Keep them informed about your business status, like any unforeseen outgoings, forecast change, etc. This helps to develop more credibility and trustworthiness. Developing a good relationship with the lenders such as banks and third-party institutions will be favourable for you in the long term.
The Final Words
Due to the cash crunch, it becomes challenging for the businesses to maintain their routine expenses such as paying bills on time, disbursing salaries to their employees, getting the urgent repair done, etc. All this leads to questionable creditworthiness, which is not good for the business's reputation.
So, resort to the tips mentioned above and improve your cash flow significantly.
