Last Updated: Aug 28, 2018
Are you having trouble with cash flow? Perhaps your sales are up, and expenses aren’t out of hand, yet you can’t pay your bills on time. Or, your customers are late paying you. Cash flow problems affect most small businesses at some point, but you don’t have to let it ruin you. Here are 11 things you can do to keep your cash flow in the positive.
Cash flow is a problem that plagues every small office from time to time. On paper you look like you’re doing OKl. Your sales are higher than last year, and your expenses haven’t increased much. Things look like you should be making a profit. But your creditors are breathing down your neck and you’re always playing catch up. What can you do? Here are some tips to get you moving in the right direction.
If you invoice clients, you’re not going to get paid until you send out the invoices. If you send out all your invoices on the 28th of the month, and your customers pay their bills around the 25th of the month, you’ll have to wait 30 days – or longer, perhaps – before they pay you. Speed up cash flow by sending out invoices as soon as you ship products or complete a job.
When you started your business you may have priced your products or services on the low side as a way to attract customers, or because you didn’t realize what all your costs of doing business would be. Now, you have plenty of work coming in, but it may not be profitable. You may find that you have to work 80 hours a week to get the work done, or that your costs for supplies or raw materials have increased. Or, you may have expenses you hadn’t planned for, like the cost of payroll taxes for employees, a need to move out of the home and to rent office space, or a need for new equipment or more physical space to run your business.
If you are in a situation like this, or if you are still charging the same prices you did 4 or 5 years ago, raise your prices. You can’t operate a small business on razor-thin margins. By raising your prices, you’ll have more cash coming in, which can help tide you over slow periods or times when customers pay late.
Some clients, particularly those who were your first clients, may get annoyed when you announce you are raising your prices. They may believe you “owe them” for “helping you get your start,” and that your price increase is a betrayal. If the customer is one you want to keep, the way to de-fuse the situation is to take the personal element out of it. Instead of arguing about why you decided to increase your prices, sympathize with client and then attribute the decision to your accountant. You might say, for example, “You know, John, I really didn’t want to raise my prices. But my accountant said I had no choice.”
Most professional advisors will be happy to go along with you, as long as you tell them ahead of time and as long as it sounds like something they’d really recommend.
One of the problems with self-employment is that income may vary drastically from month to month. When you wear all the business hats, the need to do the work often interferes with ongoing marketing. If you don’t market steadily, there will be times when no business comes in, and as a result, times when no money comes in. Under this feast or famine scenario, you may get $20,000 in payments one week, and then not get another cent for two or three months.
One way to even out the irregularities in cash flow is to seek clients who will put you on retainer, paying you a guaranteed amount of money each month. Retainers are usually set up so that you guarantee you will set aside a specific number of hours to do work for a client each month. The client pays that amount whether they use up all the time or not. If they go over the time, they pay an additional, hourly fee. If they don’t use up all the time, they lose it. The unused time does not accumulate from month to month.
Lawyers and accountants use arrangements similar to this. Public relations, computer consulting and other businesses in which clients may need repeat attention are good candidates as well.
Increase your profits by increasing your average order size. To do so, train your staff to suggest related products or more expensive options for the product or service the customer requests. If you sell online, see if you can enable upsell and cross-sell features in your shopping cart.
Money in the bank isn’t money to spend — at least not immediately. Although the Check21 laws make it possible for banks to process checks faster (and therefore debit your account faster), the law does not require banks to release funds any faster than in the past. Thus, your bank may take two business days or more to clear local checks. If your customers are out-of-state, your bank may hold deposits for up to 10 business days. If there are sizable amounts of money involved, those 10 business days can seem like eternity.
You don’t have to be a retail store to accept credit cards from your customers. Businesses and government agencies as well as consumers use credit cards to make a wide variety of purchases. Instead of waiting 30 days, 60 days, or more to collect payment from your customers, you can get paid in 2 or 3 days by asking them to pay you with a credit card instead of having you bill them. You’ll have to pay a percentage of each sale to the credit card company, and possibly a monthly fee, but those expenses may be negligible when you consider the time and money you’ll save by not having to send out monthly statements. This is a win-win arrangement. The customer can still string out payments, but you’re not on the end of the string. An added bonus: speeding up cash flow can help you speed up payments to your creditors, which may lower or eliminate interest payments you make on your payables.
Don’t limit the forms of payment you accept to the traditional ones. There are numerous forms of electronic payment systems that businesses and individuals use today and you should accept. These include ACH payments (for business accounts), PayPal, and mobile payments.
If your customers don’t like to pay bills for your type of product or service with a credit card, or if the amount is too large for them to feel comfortable charging, look for finance companies that will offer loans to your customers. Again you get paid now, the customer or patient gets to string out payments, and you don’t have to go to the trouble of sending out monthly statements.
Don’t spend weeks or months working without pay. When you negotiate deals, plan to get at least a third of the money up front if you are working on a long time project. If possible, spread the remaining payments so you cover all your ongoing expenses for the project.
If you don’t know your customer and it would be difficult to collect if they didn’t pay or if they never came to pick up work they ordered, insist on payment in advance. That way you don’t have a collection problem.
One of the best ways to avoid collection problems after a sale, is to make sure the customer is credit worthy before the sale. Take the time (and spend the money) to do credit checks on new customers. If the credit check makes the customer look risky, ask to be paid upfront in cash.
Listen to the buzz in your industry, too. If you are unsure of the credit-worthiness of a business, try to find others who have sold to the businesses. Ask is they have had any trouble collecting, and if they have, don’t make the sale.
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Keep an eye on aging accounts from existing customers. Don’t wait until they are 6 months behind in payment to try to collect. Send out late notices if you haven’t received payment by the next billing cycle. If a company who has normally paid on time, still doesn’t pay, call to find out if there is any problem with their order or with the service you are providing. If they say no, ask when you can expect payment.
Copyright 2017 Janet Attard. All Rights Reserved. May not be reprinted or reproduced in any format without written permission.
About the author:
Janet Attard is the founder of the award-winning Business Know-How small business web site and information resource. Janet is also the author of The Home Office And Small Business Answer Book and of Business Know-How: An Operational Guide For Home-Based and Micro-Sized Businesses with Limited Budgets. Follow Janet on Twitter and on LinkedIn