It is important to keep track of your company's cash inflows and outflows. Through recording cash flow statements, you can analyse what to change in your business strategy and operations. You can then use your cash flow analysis to grow and expand your business.
Particularly for startups and small businesses, such an analysis would really help to ensure you have enough runway to sustain your business. Even if it seems like profit is steadily growing, sometimes it is good to sharpen your cash flow management so your finance and operation activities run as efficiently as possible. This allows you to scale your business further.
Here are some tips to improve your cash flow.
1. Send invoices immediately and be strict with payment deadlines
Be prompt when it comes to invoicing customers. From the get go, decide whether you prefer to invoice before or after the service is completed as well as the pros and cons of both options.
Often, a customer's organisation might have its own processing times in a month. Your customer will be subjected to his or her financial processes. The earlier you send it, the higher likelihood that your customer won't miss the internal payment deadline. As invoices tend to be issued with a due date in 30 days, this ensures your customer can pay you on time instead of rolling the payment over to another month.
Emphasise your payment deadline clearly. Make sure you remind your customers when their invoices are due, be it via a call or an email. You may remind them a week before, and then immediately follow-up if it is overdue. This prevents the chance for them to be complacent about processing invoices and in turn, allows your cash flow process to be efficient.
2. Offer discounts for early payments
Going one step further, you can incentivise customers who pay their invoices early. For instance, if your invoice has to be paid within one month, you may like to give a discount for those who pay within 1-2 weeks. This ensures as many invoices are processed within their due date and the same month. You also guarantee a steady stream of cash flow.
On the other hand, while it might sound unfriendly, you can consider a late payment penalty for customers who exceed their payment deadline without valid reason. This can be done by preparing a late penalty policy for your organisation and being upfront about the potential penalty from the start.
3. Actively perform inventory management
Inventory management is extremely essential. It goes both ways. It is important to keep enough stock for customers, but it can also be dangerous to have too much. Find a balance, so it does not destroy or disrupt your cash flow.
Check your inventory and take a look at what is not selling well. For those that are not selling well, you may provide a discount to sell existing stock as it is better than not selling at all. As a learning experience, you may reduce purchasing unpopular items in the future.
When managed correctly, good inventory management can improve your cash flow. So, always monitor what is performing well and what isn't. This way, you can focus more on your top performers that drive revenue.
4. Assess your operating expenses objectively
Operating expenses refer to any costs that are required for maintaining and administering the business day-to-day. This includes office rent, utilities, payroll, office supplies, travel expenses and more.
It is vital to assess past business expenditure to plan for the future. Take a look at what was well-spent and what wasn't. Where possible, look for cheaper alternatives. Really question what is necessary and reduce anything that is redundant.
Here are some key areas to consider:
• Manpower: To accomplish certain tasks, do you need a full-time employee or freelancer?
• Office: Do you need to pay for an office space? How about leasing instead of buying?
5. Establish long-term partnerships with suppliers
Nowadays, the global supply chain is a crucial and integral part of conducting business operations. With that, it is important to foster a good relationship with your supplier. It is better to find one to partner with in the long-term, instead of searching for one in an ad-hoc manner each time or spreading too thin.
Take the time to get to know your supplier well. Think through and be deliberate with who you want to partner with. Build friendly and regular rapport. Understand what are the needs from both sides and strive to find a win-win solution. For instance, you can offer to make early payments to your supplier if they are willing to give you a discounted price for a larger bulk.
If you are looking for more tips on how to grow your business, check out our latest E-Book which shares how to:
- Optimise your finance function
- Scale up with resource efficiency
- Pick the best payment channel for you
Download it below.