Cash flow is essential in maintaining sustained business growth for both large and small companies, and getting it wrong can be detrimental.
In this article, we’re going to take a look at some of the most commonly asked questions when it comes to this important element of financial health, as well as a few key practises we advise that are useful in helping to improve a business’ cash flow.
While invoice finance is a great option for many businesses, there are plenty of things you can do to improve cash flow.
What is the importance of cash flow?
Cash flow is a really important metric to consider for businesses of all sizes. It’s quite simply about how much liquid cash you have on hand at any given time to be able to pay for things, and how regularly this cash comes into the business. This means having the cash for payroll and other monthly expenses, as well as having the cash to expand when the market calls for it.
Without cash flow, a business might find that it has difficulties operating and might need to take on debt - even if business is otherwise good
What are the causes of cash flow problems?
There are many reasons that a business might be struggling with cash flow. If business is generally poor, then naturally cash isn’t going to be arriving in your account.
However, cash flow problems also strike businesses that are converting lots of sales. This generally happens when customers are slow to pay invoices - or don’t pay them at all. With long lead times on payments, some businesses can find that they’re owed a lot of money - but that’s not good enough to be able to pay the bills.
How to improve cash flow:
- Monitor inventory and outgoings
- Reduce client risk
- Make payments easy
- Incentivise payments
- Test product pricing
1. Monitor inventory and outgoings
We would recommend regularly conducting an inventory and cut old products that have stockpiled and aren’t selling. Holding on to products because they might one day sell is holding on to potential income.
Discounting products to make way for new lines will help increase cash flow and make room for better investments. Leasing equipment and supplies instead of buying them outright allows you to pay smaller increments over a long period and cash flow won’t be as affected by a large one-off payment.
2. Reduce client risk
Before working with a customer check their eligibility. We advise running a credit check to reduce risk of late payments or communication problems. Contact credit report companies that will flag any potential issues the client may have previously had such as late or delayed payments or problems with suppliers. Base your decision on working with them on the result of the check and whether you think they’ll be reliable.
3. Make payments easy
When filing an invoice, add as much information as possible to prevent clients making excuses about lack of information. Include account details, binding payment terms and dates so that customers no exactly where to send the money, who to and when by. This will avoid confusion and questions that could interrupt payments and disrupt cash flow. Make sure you’re offering plenty of ways to pay, too.
4. Incentivise payments
To encourage fast invoice payment, we would recommend offering incentives for customers to pay invoices on time. For example, this could be a percentage discount off the invoice or a better deal on the next order of products. The Government advise to penalise later payments by adding a percentage charge onto all late invoice payments.
5. Test product pricing
To improve cash flow, some businesses test how much their customers are willing to pay by gradually increasing product price. It’s a good strategy to see how much more money the business could be bringing in without losing customers. This should be done gradually so as not to deter customers.