Many small business owners are all too aware that you can have a very profitable business but if your cash flow is tight it can cause you huge amounts of stress and push your business right to the edge – and sometimes over it.

Being aware of how the cash flow of your business model(s) works is absolutely key to running your business. Many cash flow issues come about because of problems with working capital.

Working Capital is basically the cash that is tied up in the day-to-day running of the business – the sales invoices, purchase invoices and stock.

If you raise invoices to your customers at the end of each month and they then take 45 days to pay those invoices, but to do the work for those customers you are paying your staff members on a monthly payroll or you are buying goods in then you are probably paying money out more quickly than you are collecting it, which can cause cash flow stress no matter what margin you are making on a job. You therefore need to make sure you have enough cash in the business to cover these cash flow stresses.

To flip it around the other way, imagine the cash flow of an insurance company – their clients are paying them an annual premium up front and the insurance company only has to pay out much further down the line. This gives them a positive cash flow to work with. This is why Warren Buffet absolutely loves the insurance business as it creates a cash float for him to go off and invest in other things! (as a side note we highly recommend you reading Warren Buffets book “The Snowball” link below)

The Snowball

So what can you do to improve your cash flow? Here are a few tips:

  • When taking on new clients try and agree as short a payment term as possible. Also see if you can get an upfront setup fee or staged payments built into the project or for sale of goods agree payment before dispatch or payment on delivery.
  • Chase late payers – monitor your overdue payments and make sure you put chaser phone calls in as soon as payments are overdue. Using a great system like FreeAgent will help you keep on top of your debtors.
  • Send your sales invoices out promptly – put reminders in for as soon as you are able to bill a project / job.
  • If you really need to improve things you could consider offering a discount for early payment – just bear in mind this will affect your profitability.
  • You could consider invoice factoring but again be aware this will affect your profitability so you need to be sure your margins are strong enough to deal with this.
  • If you are a stock based business try not to hold too much stock as that is cash that is tied up and also runs the risk of reducing in market value the longer you hold it.
  • See if you can reduce your expenses at all to help improve profitability which in turn will help cash flow.

These are just a few tips that hopefully will help you get on top of your businesses cash flow.