Making money is the sole purpose of most small businesses, and while many may still see themselves as being successful even if they’re not in profit at the end of each financial year, most small business owners will do everything that they can to get as much from the existing businesses cashflow, as they possibly can.
There is in fact, a relatively simple and straightforward formula that can be followed when trying to increase your businesses profitability, but not all companies are adept at it. All it requires is that you collect your receivables in a timely manner, and do everything that you can to minimise the speed at which you must pay suppliers…preferably without spoiling your relationship with them in the process! But if you’re looking for some more long term solutions to improving your cashflow, then follow our 5 simple steps:
- Forecasting is essential:
Where your cashflow is right now, and where you predict it will be in the future, is an important aspect of running a business that often gets overlooked or misunderstood. There are costs associated with the growth of small businesses, and many aren’t fully prepared for these.
A strong forecast can help cashflow become more predictable and easier to manage, and a rolling annual forecast often proves to be the best practice.
- Study your receivables/payables gap:
Look in detail at the terms that you currently offer your customers, and see how these marry up with the terms that your suppliers offer in comparison to others in the business world. If there is too large a gap between your average payable days and the average receivable days, then you’ll find yourself stuck and in need of working capital.
Managing this gap better, could lead to an increase in your cashflow, and even result in discounts from suppliers.
- Put a strong payment discipline into place:
Shortening your accounts receivable time span will mean that you need to look closely at how long it takes you to get paid, how active your collections are and if you’re in touch with your customers often enough. You will also need to identify if you are solving disputes swiftly enough and take a good look at how you resolve each one. Not only will each of these questions help you to get paid quicker once you’ve tackled them, but they could see customer relations improving tenfold.
You should also tackle payments received, in the same manner that you makepayments, and by paying in a timely manner, you’ll find it so much easier to establish and build great relationships with suppliers and customers alike.
- Try to streamline your accounts payable:
Separating this element of your business into, suppliers, customers and inventories, will help you to better tackle your cashflow. Begin by breaking down your suppliers into those who are regular and those who are one offs, and you’ll find that the options for negotiations are far more expansive with strategic suppliers.
Then take a good look at your customer base, and try to ascertain who are ‘key’ customers, such as those who may generate good revenue, but are not necessarily profitable versus those customers who may not hold the biggest accounts, but make their payments regularly and on time.
Identifying customers who end up costing money, and those upon who you can rely for timely and accurate payments, could go a long way to helping your cashflow.
- Persuade your customers to make payments upfront:
Setting targets for those employees responsible for collecting customer payments, may help incentivise them to encourage customers to pay upfront. Try to implement a target system among your sales staff, too, and work towards achieving working capital objectives throughout the entire company.