If you’re failing to meet your cash commitments each month and eating away into your capital reserves, then it’s time to make some serious decisions for your business.
A business can survive for a short time without low sales or profits, but not without a positive cash balance. It’s cash which pays the bills and allows trading to continue and if you are growing and extending credit to more customers, the need for cash can be even greater.
If you’re failing to meet your cash commitments each month and eating away into your capital reserves, there are a number of ways to reduce the chance of running out of cash.
Cash is the lifeblood of your business. It enables you to pay the bills and keeps your business operational. While you always need to have cash reserves on hand for emergencies, if your business is in an expansion phase you may need additional cash reserves to cover your costs.
If you’ve noticed your cash levels are decreasing each month, you’ll likely need to take some constructive steps to get back on track.
Here are some strategies to keep your business cash positive, and ensure your business remains viable:
Reduce Unnecessary Costs
There are probably numerous expenses in your business that you could do without and now is a perfect time to see what you can cut. Audit your expenses to identify costs you no longer need or could negotiate better terms on. There could be:
- Subscriptions to software you no longer use that are costing you money
- Fixed service plans you could switch to a lower rate if you don’t need all the functionality
- Excess inventory that you’re paying money to store, and that is tying up your cash
- Ineffective advertising costs if you’re unsure they relate directly to sales
- Anything you could do yourself if you really needed to.
Go through your last few months of invoices and credit card statements, yours and your employees, to see what could be eliminated entirely or reduced to save you money.
Make sure all your work is invoiced for as soon as possible. For larger customers you should try to get into the customer’s payment cycle or apply to be an approved supplier as soon as possible. If you are asked to do more than the original quote, then it is reasonable to negotiate additional payments. This makes it important to specify in the initial sales contract exactly what you will deliver.
If you haven’t already, sign up for accounting software to make it easier to send invoice reminders.
Raise Cash Quickly
If you need to improve your cash flow temporarily, adjust your sales and marketing plans by giving customers motivation to purchase in advance, offering early-payment incentives such as discounts, and focusing your marketing on short-term lead generation and sales, rather than longer term objectives like brand recognition.
Be aware that short-term incentives should be just that: short term. Offering discounts and incentives to ease your cash flow is fine but will erode your profits in the long run. Have a plan for executing short-term strategies and ending them as soon as you’re cash positive again.
Request Progress Payments
When negotiating new contracts with customers be aware of setting payment terms that help your cash flow, such requiring as deposits or progress payments.
- Negotiate stage payments for contracts that take a long time to complete
- Include a regular timetable for the customer to pay invoices as part of any agreement
- Agree on clear milestones for the work to be completed to reduce the chance of the customer disputing any invoices.
Being paid throughout the course of a project keeps your cash flow consistent, enables you to pay your bills regularly, and ensures you get paid for the work you’ve completed.
Manage Inventory Carefully
If you hold inventory, then tighter controls can release substantial sums of money, which can help your cash flow. If possible, hold just enough inventory to service your customers on an ongoing basis. Identify seasonal peaks and troughs and adjust inventory levels accordingly. Implement just-in-time inventory ordering, so the cost of warehousing is put back on your suppliers. Sell off any slow-moving, old, or obsolete inventory to raise cash. Even offering it at a deep discount gives you money you need, especially if that inventory was unlikely to sell.
An efficient credit control system speeds up your cash collection and reduces bad debt. Some suggestions:
- Credit check all customers before you extend credit terms
- Control how much credit you provide and to which customers. Consider using credit scoring systems and setting appropriate credit limits for all customers
- Avoid giving any customer more credit than you could afford to lose if the sale turned into a bad debt
- Send out invoices immediately after you have supplied the goods or service. Confirm that all the invoice details are correct and that there will be no problem paying it by the due date
- Monitor late payments and chase them up methodically, with the largest debtors first
- If you intend to charge interest on late payments this must be stated in your terms of trade.
Using a debt collection agency or a specialist lawyer can be an effective method of dealing with non-payers. There are also software solutions that integrate with your accounting software.
If you do need extra funding to get you through a rough patch then take full advantage of the different types of financing available:
- Speak to us about the various types of financing available to your business
- Consider asset finance instead of using up your cash reserves to purchase computers, vehicles, plant and machinery.
Remember a strong capital base is vital when in business. You may need to add in additional cash of your own if the business is still sound and the immediate cash problem is temporary.
Once you’ve identified a cash flow issue, it’s important to take steps to get your cash reserves back on track. Identify unnecessary costs and eliminate or reduce them, ensure your invoicing systems are efficient and properly managed, and consider charging deposits or progress payments on your work if you’re not doing so already. Additional funding may also enable you to get through a cash flow crunch.
Contact Diamond’s Business Services team for financial guidance and help for your business.