10 tips for better business cash flow management
Without a reliable and constant source of working capital, your company may struggle to meet day to day running costs. This is not an environment that is conducive to growth, so you’ll probably also have to let your competitors seize those new business opportunities you’ve had your eye on.
Sound cash flow management is not only necessary for keeping your business afloat. It’s also a prerequisite for moving your business forward. If you’re planning to be more strategic about your business cash flow management in the new year, here are 10 top tips from working capital experts, Merchant Factors.
- Establish a budget: Create a cash flow budget with the help of your bookkeeper or whatever software you have available to your business. The goal is to track and predict inflows and outflows of money over time – so you can plan for periods of poor cash flow.
- Invoice smarter: The most critical step towards better business cash flow management is to ensure your invoicing system is set up for speed and accuracy. You want to invoice as soon as possible after the goods or services have been delivered. And you only want to invoice once, so make sure all the necessary details are on every invoice – and that you send your invoices to the right people or department.
- Be clear about payment terms: In an ideal world, you would be able to set your own invoice payment terms. But if some customers insist on specific credit sales terms, be sure to make a note of these and get your customers to confirm payment dates in writing. This will make it easier for you to track your receivables and follow up timeously if these are ever overdue.
- Keep tabs on your receivables: Keep close tabs on your accounts receivable. Know when each invoice is due and react quickly if any customer neglects to pay on time. First, follow up with a polite and friendly email, reminding your customer about the invoice and the agreed payment date. Stay in close contact with your customer until payment has been made. Here’s more detailed advice on managing your accounts receivable.
- Minimise credit risks: Not all risks can be prevented. However, it’s important to minimise your organisation’s exposure to credit risk by conducting sound due diligence when on-boarding new customers, including thorough credit checks. If you’re planning to extend credit to customers (i.e. by agreeing to credit sales terms of 30, 60, 90 or even 120 days), you want to be sure they’re creditworthy, or you could be putting your cash flow at risk.
- Diversify your client base: Business cash flow management is also about taking a good look at your customer base and asking whether you’re putting all your eggs in one basket. If you’re dependent on just one corporate customer for your income, perhaps you should think about exploring new revenue streams in the new year. In this economy, anything could happen.
- Inventory management makes all the difference: You need to make sure that you have enough inventory to meet customer demands. But any excess stock is idle stock; and you don’t want to tie up cash in inventory that’s sitting in your warehouse with nowhere to go. It’s worth the extra effort and expense to put excellent inventory management processes and resources into place.
- Hire with care: The cost of hiring the wrong person for the job – or company culture – can really impact your cash flow. This is because recruitment costs, as does training and induction. And if the person you’re investing all this cash in does not offer you a good return on your investment, you’ll waste precious working capital. Even worse, you may be looking at the additional cost of a severance package. So, hire carefully and with your cash flow in mind!
- Choose your suppliers wisely: Are you getting the best possible deal from your suppliers? If you’ve done your homework and you’re happy with the quality or service but not the price, could you negotiate early payment discounts? Of course, this may require business finance.
- Consider factoring: Factoring is a business cash flow management strategy that is used by organisations around the world. Often referred to as “accounts receivable financing”, factoring involves selling your accounts receivable to a factoring company, in exchange for a percentage of the capital that’s owing on the invoices. The factoring team takes over the responsibility of collecting payments directly from your customers. Once payment has been made in line with your invoice terms, you receive the balance owing on the invoice minus an agreed fee.
Merchant Factors has been providing working capital solutions to SMEs and growing businesses for almost 30 years – providing these organisations with an innovative and flexible alternative to bank finance, while supporting them with expert credit control and debtor administration services.
Merchant Factors’ independence, experience and flat organisational structure means that, unlike many larger financial services institutions, Merchant Factors can customise its facilities to suit most companies’ unique needs.
This independence also enables Merchant Factors to offer the shortest turnaround time in the industry from application to pay-out.For fast, flexible business finance – contact Merchant Factors today.
Finance beyond the Numbers.