Your cash flow has the ability to make or break your business. It doesn’t matter if you have lots of clients and a healthy profit and loss; if your bank account is empty, your business will grind to a halt.
But cash flow can be unpredictable. All it takes is one bad debt, one slow paying client or an unexpected expense and you can find yourself in cash flow fire-fighting mode.
At Nipren, we recommend having procedures in place to protect your cash flow, even if it isn’t a problem within your business right now.
Here are our top 6 ways to improve your cash flow.
1. Reduce your sale cycle
The sales cycle is the time between issuing your sales invoice and the invoice being paid.
Most businesses offer their clients credit, and this is typically 30 days. This means your business will have to wait 30 days after it has provided its product or service until it is reimbursed. However, in reality you may find that your clients often exceed their credit terms.
During these 30 plus days you will have to continue to spend out on buying new stock and incurring expenses related to winning and servicing new clients. So, slow paying clients can effectively stop you from winning new work. Therefore, you may have heard of businesses failing because they have over- traded. They have too many clients in relation to their available cash, so the business ultimately fails.
To improve your cash flow, we recommend that you try to shorten your sales cycle to as few days as possible.
If your business model allows it, the easiest way is to set your clients up on recurring billing and ask to be paid by direct debit every month.
If you send out proposals to your clients, try to get it sent out, agreed and signed as quickly as you can so you can set up a retainer as soon as possible.
2. Eliminate mistakes in your invoicing
There are occasions when admin errors can create cash flow problems. The main one being errors on invoices which can delay payment processing on the client’s side.
Common invoicing mistakes include the wrong fee, the wrong bank account and the wrong address.
If your client is likely to want to pay you by check, ensure that the invoice is sent to the right person.
Most of these mistakes arise when your invoices are created in haste or simply human error if a manual process is used.
We recommend using accounting software such as Xero or QBO to create your sales invoices. That way, you can create a sales invoice template within the system to ensure that your details, such as preferred payment method and bank details, will be correctly shown on every sales invoice you produce.
The software will also prompt you to enter the client’s details when setting them up, which should remind you to ask for the correct names and contact details from the start.
If you email the invoices to your clients directly from the software, it will also tell you if the invoice has been viewed, so clients cannot use having not seen it as an excuse for non-payment.
3. Ask your clients to pay you using a credit card
If you let them, clients can often exploit your credit terms to assist with their own cash flow.
How often have you contacted a client once their invoice has fallen due only to be told that they cannot pay you now, but should be able to in an additional 30 or 60 days?
This situation can be difficult to deal with if you have never encountered it before. It can also be tempting to grant the additional payment terms in the hope of maintaining a good relationship with your client, even if it will prove to be detrimental to your own business.
This is where having procedures already in place will help you to deal with payment push backs effectively.
If the client has asked for an extension of up to 30 days, we recommend that you ask them to pay you using a credit card. You can explain to them that doing this will be the same for them (as the credit card company will give them the additional 30 days to pay off their debt) but will be significantly better for you.
If the client has asked for more than 30 days to settle your invoice, then we recommend offering to discuss setting up a free installment plan. Starting this kind of conversation will enable you to better understand your clients cash flow problems, and you may find that they can afford to pay your invoice off in weekly or monthly installments. This is a win-win for both you and the client, assisting both of your cash flows.
4. Offer an incentive to encourage clients to pay you early
It is likely that your clients will be faced with a pile of vendors to pay at the end of each month. While they may pay each and every one, you could be creative and offer incentives to ensure that your invoice is always top of the list.
Early payment discounts are good but will result in you collecting less money. A more creative option could be to offer a lottery ticket to anyone who settles your invoice early. That way, your clients would be in with the chance of winning quite a lot of money should they pay your invoice.
For an incentive like a lottery ticket to work, it is important not to send it out until your sales invoice has been paid in full.
5. Pay your suppliers later
If all your clients are paying you within their credit terms and it is your own suppliers who are causing your cash flow worries, it may be worth using your own credit card as a method of extending the credit terms.
This works in the same way as in point 4 but in reverse.
By putting a purchase on a credit card, you will often have an additional 30 days to settle the debt before any interest has accrued. The result is that your suppliers remain happy as you have paid their invoices, but your cash flow as been given a bit more breathing space at no extra cost.
6. Change your business model
There may be occasions where your cash flow problems are deeper rooted that simply slow paying clients or too many invoices from vendors.
It may be that to improve your cash flow you will need to make amendments to your business model.
Once option is to bring in a new service. This could be something that requires clients to pay on a retainer or subscription basis, so you know that you will have a guaranteed injection of cash each month.
Another is to change the way you work with your current clients.
If you pay for purchases on behalf of your clients using your own credit card, you could flip this and instead use their credit card but charge a commission for this service on your invoice.
If your clients are unhappy to pay for their own purchases, it could be an indication that they are unhappy with the project. To reassure them, you can put in place a retention system. Every time you bill them, you agree to remove a certain percentage of the project that they will then pay you at the end of the project, providing they are happy with how to project has gone. This will act as a guarantee for them, as it gives them confidence while meanwhile allowing you keep regularly receiving some cash. The goal is that on the final bill you will recover your retention.
Here at Nipren, we specialize in assisting foreign entrepreneurs manage and improve their cash flow. If your cash flow is holding you back or you would like to discuss introducing accounting software and better financial systems into your business, please get in touch.