Cash is king in small business. I’ll walk you through ten steps you can take today to improve your cash flow and three long-term strategies to help you grow.
Making sure you get paid right away is one of the most important things you can do for your business. Yet, somehow, this also seems to be one area where many companies struggle.
Let’s face it; most of us are a little lazy, and the digital world hasn’t helped us a lot. We’re so used to shopping and paying for things online without any extra steps that when we encounter a more complicated process, we don’t want to deal with it.
No matter what else you do, make sure it’s easy for your customers to receive your bill and pay you. For example, use a system for electronic billing, and collect payment through the same system. Your customers will appreciate an easy process, and you will get paid faster.
The number one way to improve your cash flow through customer billing is to collect payment for your services up-front. This way, you have cash in the door before you pay expenses related to your services.
Depending on how you currently bill, this could require some significant changes. For example, it’s impossible to invoice up-front if you bill hourly for your services. Of course, you could ask for a deposit, but I suggest you consider moving towards a fixed fee model instead of hourly billing. The benefits of fixed-fee pricing and how to make it work is an entire topic on its own. So instead of doing a deep dive into it now, I’ll say that if the accounting industry can move away from hourly billing, you should seriously consider it too.
If you can make this work, your billing process is optimized, and you can skip ahead to number 6. If not, keep reading for some other tips for improving your cash flow through customer billing.
Do you have a good routine for billing your customers? Are you billing at least weekly, if not more often? Sending out invoices as soon as possible is critical to improving your cash flow. Many clients have found that invoicing customers on the same day a job is completed increases the likelihood of getting paid. Your customers can’t pay you if you don’t bill them, so if you don’t master this process, you won’t be able to optimize your small business cash flow.
Do you know how many of your customers haven’t paid yet? Do you know how many invoices are more than 90 days old? If you’re not reconciling your accounts receivable and following up on unpaid invoices, probably not.
In my experience, it’s normal to struggle here for two reasons. First, because the process is time-consuming, most business owners are stretched too thin to do it consistently. Second, it’s easy to underestimate how big of a problem this is for your business. You feel like you know our customers and can’t imagine that someone isn’t paying you. I recently had a client that was shocked to discover that their client hadn’t paid their monthly fee in over six months. If you aren’t managing your accounts receivable, this could easily be you.
If you do extend payment terms to your customers, do you offer an early pay discount? If not, you should consider adding one to your billing policy. It may seem counterintuitive, but if your goal is to improve your cash flow, this can be a huge help. You can speed up the collections process without investing any extra resources by giving your customers an incentive to pay right away. Plus, your customers will appreciate the discount.
Not sure this is the right move for you? If your margins support it, try offering a discount to some select customers and see how it affects their payment habits. If you like what you see, think about rolling it out on a bigger scale.
Raising your prices can feel really scary. If you tend to overthink, this will feel even harder, but please don’t’ skip this part! Raising your prices can be one of the easiest ways to get more cash into your business. A complete strategy to raising prices is worth going into separately. But, if your business currently has more customers than you can serve, you should consider raising your prices.
Invoice your customers as soon as possible and make it easy for them to pay. Once you have this down, reconcile your accounts receivable and follow up on unpaid invoices. Then, if your margins are large enough, consider adding a discount for early payments.
If this sounds like too much, this is a great area to consider investing in outside help. It can often pay for itself in improved cash flow and will create a better customer experience. An experienced bookkeeper or virtual assistant can help with these tasks, so you don’t have to do it all independently. I also offer these services as a part of my customized accounting packages. If you want to learn more about how I can help improve your systems or take over the entire process, you can schedule a free introductory call.
Now that we’ve covered how to get more cash in the door let’s talk about keeping it in your business as long as possible.
If you want to keep more money in your business, you need to examine what you’re spending it on. This doesn’t mean that you need to go on a rampage and slash your budget. However, you do need to review your spending and take care of the easy stuff.
For example, do you have any software subscriptions that you’re not using or have overlapping capabilities with other subscriptions? Do you have regular supplies on an auto-ship schedule that has built up too much product on hand? Again, you want to cut costs that won’t cause hardship to you or your team. Anything beyond that requires more precision and strategy than I can cover within the context of this article.
Generally, you want to avoid paying your vendors until you have to. For example, if a vendor allows you to pay in 30 days, don’t pay in 10 – unless they give you a discount to pay early. If you’re not sure if a new vendor will provide the option to pay later, ask. The worst thing that can happen is they tell you no.
Credit cards can be a great way to improve your cash flow because they can extend the time it takes for the cash to leave your bank account. So, for example, if a vendor doesn’t require payment for 30 days, and then you pay the invoice with a credit card, and it happens to be at the beginning of your billing cycle, you can delay the actual cash out the door for 60 days as compared to paying right away.
A word of caution on credit cards – do not charge more than you can pay off when the bill comes due. Interest charges will destroy any benefits you gain by charging purchases in the first place. If you’re in a position where you don’t have the cash to operate your business, credit cards can provide some short-term funding at very high rates. If you’re in this situation, you need a strategy to get yourself out of it beyond just charging expenses to a credit card.
Inventory and supplies can be cash hogs in a business. If these make up a large portion of your expenses, you have to balance between having enough on hand to meet demand, purchasing in volumes that yield better prices, and tying up too much cash in purchasing inventory. This is particularly difficult in the current business environment, with supply shortages and shipping delays plaguing almost every industry.
I suggest starting this process by reviewing the inventory and supplies on hand and calculating your turnover. Inventory turnover is calculated by dividing your cost of goods sold for a period by your average inventory for the same period. A high ratio means you might not have enough inventory on hand, while a low ratio means you may have too much on hand. You can then use this information, along with lead time to replenish inventory and expected seasonal variations, to figure out if you need to scale back on inventory purchases for a while.
The overall strategy here is to make sure you keep money in your bank for as long as possible. You can utilize vendor payment terms and credit cards to delay making payments. You should also be mindful about how much cash you have tied up in inventory or material purchases.
These strategies will likely add some additional steps to your payment processes. For example, you’ll have to monitor bill due dates and make sure they get paid timely. If you develop a sound system for keeping track of everything, this should not take much extra work. If you’re not sure where to start or you’d like someone else to manage the process for you, we should talk. I can help establish and run an efficient process that will maximize your cash flow.
Most of the time, when I start working with a new client, they have been in a reactionary state instead of a strategic one. And you know what? I get it. Sometimes, when running a business, especially if you’ve been growing quickly, you don’t have time to be more strategic. We’ve all been there.
But, if you want your business to have more cash in the long run, you need to have a strategy. Having a strategy means getting out of a reactionary state, slowing down, and planning how you want to grow your business and how you’re going to invest in that growth.
Building a strategic plan is hard work. First, you’ve got to figure out what you want out of your life and your business. Then, you have to figure out how actually to make it happen! But, even though it’s hard, this is where the magic starts to happen.
Let’s say, for example, that you currently have a dog walking business, but your dream is to own a country bed and breakfast for dogs. Your current business is going well, you have enough clients, and you’re thinking about hiring your first employee. However, you currently work only in an urban area, and all of your clients are in a place where you can walk or take public transportation. You are making enough money to live comfortably, but you’re not building savings.
Once we’ve gone through items one through ten above to make sure you’ve optimized your current business as much as possible, then we get down to building your strategy. When you have a good strategy in place, you’ll find it easier to make big decisions and focus on what matters.
One of the biggest hurdles to your country dreams will probably be buying a property. This is a long-term goal that will require building cash and credit history to achieve. Does this mean you’re going to spend as little as possible until you reach your cash goal? No! You can’t grow a business if you’re not investing in it. Your strategic plan will help you know what is worth spending money on and what won’t get you to your goals.
If you are serious about having more cash in your business, you need a cash flow forecast. Your cash flow forecast predicts when you have money coming in from customers and when you’ll need to pay your vendors and employees. Your cash flow forecast will also guide you in strategic decision-making and help ensure that you don’t run out of money unexpectedly.
For example, let’s go back to our dog walking business. As part of our strategic plan, you’re planning to purchase a vehicle for business use so that you can start building a suburban client list that is more likely to be customers of your doggy bed and breakfast. You’ve hired two part-time employees to take over your city-center clients so that you can focus on building new relationships while maintaining your current revenue streams. You find a good car at a great price, and you have cash in the bank to buy it. What do you do?
You have the cash, and it fits the strategic plan. Easy decision, right? Maybe not. Your new employees need to get paid. You won’t have enough cash to cover the next payroll if you buy the car based on the cash flow forecast.
Does that mean you have to pass on the car altogether? If you’re ready to buy the vehicle, you can consider a loan or a lease and factor those payments into your cash flow forecast. However, since it may take some time to find more clients to cover the car expenses, you’ll want to make sure your forecast covers the cost of the car for at least three months.
Your cash flow forecast helps you make sure you have cash on hand to meet your immediate needs and helps guide you as you’re making long-term decisions. Growing a business and your cash flow often requires some upfront spending, and your forecast will help keep you out of trouble.
When you started your business, did you think a lot about where to open a bank account? If you’re like many business owners, probably not. Starting a business is overwhelming, so many people go to the same bank where they have a personal account or a large bank that offers good benefits for small businesses.
If your current bank isn’t local, it’s worth considering making the switch to a local bank or credit union. Small banks are invested in your local community, which matters to most small businesses. They are also more likely to build relationships with small business customers than most large banks. These relationships can be meaningful when your business is ready to take out loans.
Let’s revisit the dog walking business again. You’ve been working hard, your business has grown, and you’ve found your dream property for your doggy bed and breakfast. But, you need a loan to make this happen. Your loan needs to help you purchase a beautiful property and renovate the old barn and farmhouse to create your dream boarding facility.
If you’ve kept your accounts at a large bank, the process is most likely impersonal and based on predetermined formulas. You’ll get approved if you meet their criteria, but you may not get the best rate. On the other hand, if you fall short of what they are looking for, you may miss out on that dream property.
If, however, you’ve had your accounts with a local bank, they are more likely to factor your relationship with the bank into their decision-making. Maybe you don’t exactly fit the criteria for the loan, but they know you, and they know the history of how you’ve grown your business. You have the chance to present your strategic plan for your bed and breakfast, and you can convince them that you can be successful. Not only do they approve the loan, but they work hard to make sure you get the most favorable terms for your business.
Is this guaranteed to pay off? No. Banks will always have lending criteria, and sometimes, despite your best effort, you won’t qualify for what you want. The good news is it’s easy and doesn’t cost you anything. Suppose it pays off in the long-run, great. If not, no harm done, and you’ve helped support a local business in the process.
The key to success with long-term strategies is consistency. Your strategic plan won’t help you if you don’t revisit it often. Your business will evolve, as will your dreams. If you try to do a strategic plan once and forget about it, you will have wasted your time.
The same thing goes for creating a cash flow forecast. To create an accurate forecast, you need to review your assumptions often and compare your forecast to actuals. If you have a significant discrepancy, figure out why so you can make sure it doesn’t happen again.
This is hard work and probably way outside of your comfort zone. If you feel like you’re ready to start working on your strategic plan, we should connect. I love working with business owners like you to help you realize your dreams. I work hard to find a way to meet your budget and scale my services along with your business. You’re going to have to work hard to make your dreams come true, but you don’t have to do it alone.
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