If you run your own business, then you’ll understand the importance of cash flow. In fact, creating a relationship with money that works for you is one of the best things you can do for the future of your business. So what do you do when the well runs dry? You really don’t want to dip into your personal rainy day fund so here are some simple tips for dealing with those cash flow problems.
How to deal with cash flow problems
Ask for lines of credit
A line of credit works in a similar way to a credit card. You receive a product or service, and once you pay the invoice in full by the end of that month, you pay no interest on the credit. This is a very common way to pay for small businesses to pay for services or materials over the course of a month and could help you out of a financial hole with in a pinch.
Negotiate better terms
If you already have a line of credit with a supplier, then perhaps you can try to negotiate a better deal. Say for example, if you usually must pay at the end of the month, ask if you can you extend this to 60 or even 90 days. This extra time could make a real difference with cash flow problems and allow you to receive payment from your customers and clients before having to pay your suppliers.
Get a short-term loan
A short-term loan is a great way to give your business a quick cash injection while not taking on any significant debt or committing to a long-term financial product. The easiest way to get a short-term loan approved quickly is by choosing a financier that specialises in this particular form of credit. Lenders such as Spotter Loans will not only approve your loan in double-quick time, but they’ll also help you out even if you have a bad credit rating.
Give your clients incentives to pay faster
If you find that getting your clients or customers to pay on time is getting harder and harder, then you can offer incentives for prompt payment to deter cash flow problems. This could be a small discount on future purchases or even a discount on current invoices if the invoice is paid immediately. You should also consider setting up auto payments or accepting payments online. The easier you can make it for your customers and clients to pay, the more likely they will pay on time.
Reduce your expenses
Take a look at your business expenses and try to pin down those which are unnecessary. And no, it doesn’t matter how small those outgoings are – if you don’t need it, don’t spend money on it. Look at everything from industry magazine subscriptions to company vehicles and if it’s not needed, get rid of it. While this is by far the best approach to take, it will only eliminate future cash flow problems and may not have much of an immediate effect.
How to avoid future cash flow problems
Cash flow management is essential for all businesses, especially small businesses. Cash pays salaries and bills and enables you to invest in growth. But no company is safe from unexpected cash flow problems, whether it’s due to late payments, a customer’s bankruptcy, or an investment that doesn’t generate the expected income. Avoiding cash flow problems and protecting your money is now more important than ever in order to keep your business growing.
Make regular cash flow forecasts
Keeping track of your cash flows is essential to keeping your business safe. As part of good cash flow management, you should do a cash flow calculation and make projections. If you put all of the information you have in one cash flow statement and separately forecast future cash flow, you can do a good cash flow analysis and have a much greater awareness of the likely opportunities and potential threats.
That means you need to make sure you keep good records. Take the time to keep a log of the company’s income and expenses and keep the information current. When you have a clear picture of your company’s financial condition, you can identify problems and decide how to avoid cash flow problems. A cash buffer, such as a “bad days” fund that your company can access in an emergency, can also be a good idea in the event that critical machinery fails or a large bill is overdue.
Analyze the creditworthiness of your customers
When we start new business, we often only think of getting new customers to choose us as their supplier of goods or services. But when it comes to protecting cash flow, choosing the right customers is also important.
It is important not only to use your own information, but also to provide potential customers with alternative information if possible. You should also go beyond purely financial assessments and check that the prospect’s strategy and culture are in line with your own. You can also consider whether they have risk coverage and cash flow protection.
Manage unpaid invoices to minimize bad debts
Bad debts can quickly become a problem. Not only do they drain resources, but they can also negatively impact forecasting and your bottom line. One way to avoid cash flow problems in business is to use a forward-looking strategy to minimize debt.
We therefore recommend the following: Use standard terms and conditions. Every customer should be aware of this agreement from the beginning of a business relationship, including any penalties for late payment. Next, you should proactively decide when it makes financial sense to investigate an unpaid bill.
The burden of proof is on you, and there are often considerable costs involved in collecting an invoice, so knowing your “tipping point” can save resources in the long term. Once you’ve taken the right steps, you should start developing a relationship with your primary contact at your client’s company. Instead of waiting for an invoice to be overdue, you can initiate a transparent dialogue about problems and goals in good time.
Anticipate customer bankruptcy
With rising interest rates and complex trading conditions, receivables management is becoming increasingly difficult for companies. The bankruptcy of customers or suppliers can be catastrophic, especially for unprepared small businesses.
You should ensure that you understand your market by obtaining data and information about business contexts, debt collection practices and the legal system in force in your country, especially if you are dealing with a customer in a foreign market. Four steps to protecting your business from a customer bankruptcy:
1. Analyze continuously.
Make sure you have the data to make informed credit line decisions.
2. Be careful.
Look for early warning signs that you can use to tell if a customer is having problems. This allows you to proactively manage customer debt.
3. Understand your market.
Familiarize yourself with the political and legal systems in your market and make sure you comply with local regulations.
4. Have a plan B.
Contingency planning is key to avoid cash flow problems. This is most effective at the local level and should involve a risk of bankruptcy.
Conclusion
Sometimes you have good cash flow management and think you have selected the right customers for a business, but you can never completely avoid cash flow problems. It can be difficult to predict bad debts, but cash flow protection is possible. Third party expertise and services, such as trade credit insurance, can help your business protect against credit risk and protect business growth.
Follow these simple tips and not only will they help your current cash flow woes but your business could enjoy a healthier long-term outlook. But remember that a temporary cash flow problem is not something that you need to worry too much about, but still, it is something that you need to address. Leave it too long, and even these quick tips might not be enough to stop you dipping into your personal rainy day fund.
