Cash flow can be one of the biggest challenges for any business, regardless of size. So today I’m going to talk about the basics of what the term cash flow means, and also some of the ways which you can improve your business cash flow.
So, what is cash flow? Well, cash flow is quite literally the flow of cash in and out of the business.
Sounds lovely and simple, right? Because in essence it is. In fact, whether we run a business or not, we have to think about cash flow.
We all need to make sure that we have money in our banks for when the mortgage or the rent is due. We need to make sure that we have enough money in our accounts to pay the bills that we’ve got, for example the electricity or the phone bill, the broadband, whatever it is. That’s cashflow. Just making sure that the money is in the right place at the right time. So it really is that simple.
Now, I know it all sounds pretty logistical, but often a business will confuse turnover and profit with cashflow and that can be deadly.
So, let me explain all of them…
Turnover is the amount of money taken in by a business in any particular period. This could be a day, a month, a year. In isolation, this doesn’t tell you anything about a company’s cashflow situation. In a similar vein, profit is a nice thing to talk about, but it doesn’t tell me whether or not the company has the money to pay its bills or its staff.
Now, when you are running a business, you should always aim to have enough cash available to pay all of your bills, even if some of your clients don’t pay yours. Think about it like having enough money in your bank at the end of the month to pay your rent and mortgage and car loan or direct debits, even if your wage is going to be late. It’s having the ability to cover the bills, even if something goes wrong with the income stream coming in.
How can you improve your cash flow position? I’ve got five big top tips on it. So, tip number one, get money in quicker.
Now there’s a number of ways you can do this. For example, you might want to reduce your payment terms. It might be that you offer 60 days and you’re gonna bring it down to 30 or 14 or seven days. Or with new clients, you might start that relationship with a shorter payment term, so you don’t have to have the same terms for every one of your customers. That would be your B2B customers.
Now, you can either penalise late payment or you can incentivise prompt payments. So some companies make small discounts for quicker payments and that can be really popular with clients who have really good cash flow and want to make savings on their invoices.
Tip number two, in the same way you get extended payment terms, you could ask for 60 days credit on invoices that you’ve got to pay or ask your supplier for monthly invoicing rather than ad hoc. This would mean you could extend your payment period by potentially up to another 30 days.
So supplier invoices for some materials on the 1st of January, and you have to pay on receipt of the invoice. Now for asking for monthly invoicing and 14 days credit, you could get the invoice on the 31st of January and have to say the 14th of February. So it gives you 45 days grace before you have to pay just by moving the terms around.
Number three, you could use a factoring company.
A factoring company is a financial intermediary that will purchase your business’s accounts receivable, your invoices, at a discount and in return your business will receive immediate cash flow and the factoring company then take over the responsibility of collecting the payments from your customers. However, be warned there is a cost to this service and they will be dealing with your client directly for payment which could damage your client relationship if it’s handled badly so just be aware of that.
Tip number four, sale or return.
This is a technique that works really well for some businesses. You get the stock to sell but you don’t own it so you don’t pay for it until it sells. For example, car dealers will sometimes display a customer vehicle on a sale or return basis so for the car dealer they haven’t got the initial outlay or the risk of buying the car and they often work on a smaller markup margin.
The customer is getting the car displayed and they’re getting it advertised in a location where customers are going to see it and they’re not having to pay for that. They might also be able to agree a higher price with the dealer as the car remains their property and therefore they are suffering any depreciation while it’s sitting waiting to be sold.
This practice really isn’t that uncommon in the publishing sector where bookshops for example, might take books on a sale or return basis which removes the risk for them if the books don’t sell and the publisher still gets the visibility in the store that they’re looking for.
Now finally my last tip, think of creative ways to invoice.
For example, you could ask for the payment in advance. I know that sounds crazy but it’s what online retailers do. Think of Amazon! Getting goods paid for before they are dispatched. It can work in other sectors as well, you could set up a subscription service where customers pay you regularly so this is typically done in places like gyms but it’s a good business model for companies like Gusto and HelloFresh.
It gives them regular, predictable cash without having to chase customers. Or if you’re a business who’s delivering projects that might extend over several weeks or months, then you could ask for stage payments instead of waiting for the project to be completed before you send the invoice. That’s how a lot of builders work, for example. They’ll ask for a chunk of money upfront and then one or two during the project and a final payment at the end when the project’s finally delivered and it means that you use the client’s money to buy the materials and pay the staff as you’re going along the way. It’s a brilliant way of protecting your business.
So there you go, a whistle-stop tour on cash flow!
Remember to check out some of my other videos as well where I talk about writing a business plan and also growing a business.
Hope they’re all really useful together and I guess I’ll see you next week!