Ever had that feeling when your small business has had a bumper month, client work is on the rise, things are really busy and you look forward to the end of the month only to get a nasty surprise that it hasn’t flowed into your bottom line. As a business owner it’s easy to get adsorbed in the day to day running and servicing of clients without giving one of the most critical aspects of your business the attention it deserves. Cash flow is the life blood of any business, without it, bills go unpaid, commitments mount up but worst still it will lead to stunting your growth potential or in chronic circumstances ultimately lead to closure.
With a few quick wins, the right structure and focus you can get back on top of your cash flow and turn all that hard work into gold.
Tip 1 Invoicing – Whether it is due to lack of time, not having a repeatable process or just that asking for money repeatedly makes you uncomfortable, the biggest mistake is being too passive around invoicing practises. You should know at any one time what invoices need to be sent, have been sent and are overdue so you can take action and get that money in the door as soon as you can. Try an upfront commitment fee (usually 50%) on project sign on, charge a penalty for late payment (usually 5%) and stop work after 30 days due, reduce invoice payment periods to 7 days and invoice immediately on job completion, incentivise early payment with a % discount and make sure you are monitoring and following up all invoicing on a weekly basis.
Tip 2 Know your Costs – It’s a lot easier to spend money than to make it, when operating a small business every dollar spent needs to be returning value and contributing to generating revenue either directly or indirectly. If you don’t know what your costs are, particularly your overheads then I guarantee money is just walking out the door. You need to understand where the business spends its money and in particular what the biggest items are. Try reviewed your operating costs such as vehicles, phone, office expenses, equipment leases, insurances, bank fees and entertainment. There is a lot of choice these days and deals being done to attract and retain customers, don’t be afraid to ask for a discount or move your business if you have to. Review the payment terms with your suppliers, are you paying too early?
Tip 3 Are you Structured Right? – The key to changing and embedding good cash flow practices is knowledge and structure, without it you can so easily just go back to flying blind with no money in the bank. Firstly make sure your personal and business finances have clear lines of separation with separate transactional accounts, otherwise things can get messy. Aim to have 2 months of operating expense cash on hand in case of an emergency, I know that may seem like a pipedream at this point but you will get there once everything is cleaned up. You must have a cash flow budget/forecast using historical actuals if your business has been running for a while or projections if the business is new. Actively update and monitor this so you know your cash flow position at all times (made easy if you have an online accounting package, see Tip 5) and can act accordingly, for example if cash flow is tight in a particular month you may offer clients a discount to pay now to address this. Another way to smooth out your cash flow is to utilise business credit cards and overdrafts although I wouldn’t recommend this until you are on top of things otherwise used flippantly it can get you further into trouble.
Tip 4 Profit Margins – When your business is first starting you are generally willing to lower your sales or fees to bring clients in the door to gain credibility and win further clients, however as your business matures and the level of work or sales increases you need to continually review the margin between what you charge your customers and the cost of running your business (another important reason to understand your cost profile). The other important factor is inflation, your costs are going up every year and if you don’t adjust your prices then your profit margins are naturally being eroded without you even noticing. Try testing out increased pricing with new customers and see if it impacts your volume of business, do your research, look at your competitors and where you are placed in the market.
Tip 5 Innovate – Take advantage of all the fantastic new accounting packages (such as Xero and QuickBooks online) and payment technologies. With cloud based platforms it now takes minutes to sign up and set up or transfer your existing finances. What once was a complicated, time consuming process to do the invoicing, produce the financial reports and reconcile bank accounts is now done with automated bank feeds, dashboards and one click reconciliation. The invoicing functions allow you to generate, send and set regular follow up emails, doing all the chasing for you. Why not also try utilising your banks’ mobile phone credit card payment offering so you can take payments immediately instead of invoicing.