Our guest blog this week comes courtesy Nick Braithwaite. Nick is Sales And Marketing Manager for Clearbooks, providers of  Small Business Accounting Software.

It is often said in the business world that cash is king; a saying that should become a motto for small businesses during hard times. A company may be profitable however if its cashflow is poor it could falter. Below is a list of pointers to help improve a small business’s cash flow. 

1. Extend Supplier Terms And Reduce Customer Terms 

Two ways to increase a small business’s cash flow; reducing customer terms and extending supplier terms. The longer a small business has to pay suppliers and the quicker it can get customers to pay the more cash it will have available. This can be achieved through offering incentives such as early settlement discounts.

2. Offer Early Settlement Discounts

Reducing the total amount a debtor has to pay in exchange for quicker payment will boost cash flow. A lot of businesses will jump at the opportunity to pay less. A typical example of this could be reducing the amount owed by 1-3% if a debtor pays within 10 days instead of 30. There is a downside in the fact that this will eat into revenue.

3.  Chase Late Payments Automatically

Using software either on or off line that can automatically chase payments will save money as less time will be spent completing administrative tasks such as checking which payments are due. It will also help cash flow because customers may well pay earlier as a result of a payment reminder. An ideal solution would be to have automatic e-mail reminders set up in place for each customer. If a small business does not use email then having software that alerts it to the fact that an invoice has not been paid should help to initiate a late payments process (see below) quicker. A point to add to this, which could have its own heading; a small business needs to make sure it invoices its customers on time in the first place.

TOP TIP: Use a Late Payments Process 

Having a system in place that can help a business reclaim money from late payers will get cash to where it belongs quicker. If business owners and employees understand how to go about getting cash from a late payer then the issue will be resolved quicker. An example could be; late payment noted, email sent, after no response: telephone conversation and then a written letter. 

4. Check Credit Worthiness Of Customers

One of the key ways a business can improve its cash flow is to check out new customers’ background information before commencing business. If a business takes on a customer that has a bad credit rating it is asking for trouble. There are various ways that you can check a company’s credit worthiness; checksure.biz and the Companies House website both allow you to check the credit status of potential customers. 

5. Debt Factoring

Debt factoring allows a business to receive payments for unpaid invoices quicker than it would from its customers. The debt factor gets a fee for paying the invoices and collecting the money owed from customers. Factors come in a variety of forms they may be independent or they can be part of a bank. Debt factoring is something to be considered when a business is in need of cash urgently rather than something that should be done regularly to help improve cash flow. 

6. Negotiate by Bartering

A small business maybe able to offer its services in exchange for decrease in amounts owed to a supplier. This could be a design company offering their services for free in exchange for a reduction in the money they owe to a printing company. If negotiated successfully this could provide a boost to a business’s cash flow. 

7. Diversify The Client Base 

If a small business relies on too few customers its cash flow will feel the impacts of one customer paying late. If a business has more clients, each with smaller accounts the risk of one paying late or in the worse case failing will be reduced. Diversifying the client base is a key way a small business can improve its cash flow. A small business should look for cost effective ways to expand its customer base; one way could be to offer an affiliate scheme.

8. Decrease A Business’s Offering

Some small businesses diversify too much during the good times and end up stuck with too many products that cannot be shifted during the bad times. If a small business holds stock, reducing the amount and types could prove beneficial. The quicker turnaround time as a result of a decrease in the stock holding period will increase cash flow. The worry for a lot of small businesses is that through doing this customers maybe lost, however in some cases this can countered this by improving the quality of the stock. 

9. Negotiate A Discount 

This may seem unlikely however if a business can show that it could be beneficial to the creditor to offer a discount they may agree. Ultimately if you don’t ask you don’t get. If a small business can come to an agreement, it will benefit its cash flow and potentially ITS profitability as well (depending on what the terms are agreed for the discount).

10. Consider Changing Loans 

If a small business has several loans for different sections it could benefit through consolidating these into one loan in return for a lower interest rate. The main thing here is for a business to have shopped around to see that it has the best loan available. By decreasing monthly repayments the business’s cash flow will increase. 

A small business should regularly review all aspects of its business to see where savings can be made with the overall goal of increasing cash flow.

Do you have any tips for improving your cash flow? Let us know about them in the comment box…