Ask any accountant why most businesses fail and they’ll tell you the same answer: they run out of money. Even profitable businesses often fail because they run out of cash in the bank.
Here are three simple methods to help improve the cash flow in your business without having to become an accountant yourself.
Secret 1: Systematic credit control
While good small businesses do the work to high standards and deliver on time, they often fail to invoice on time, and frequently there are mistakes in the invoices they send out. Combine this with inconsistent efforts to collect payments and it’s a recipe for disaster.
If you find this is too difficult for you to manage yourself, overcome it by hiring a part-time bookkeeper. These are very affordable (£20-£30 per hour) and will process in half a day what would take you a couple of days to handle.
Make sure that facts and figures on your invoices are carefully checked before they are sent. As part of your credit control, put a call into each customer before the invoice is due and confirm that everything on the invoice is correct. While this may seem overkill, if you have a small number of big customers it can mean the difference between a bumper month in the bank and going overdrawn.
Finally have a series of steps to recover overdue payments, starting off very professionally and politely and gradually becoming more stern. Don’t be afraid to stop supplying persistent bad payers. Who wants customers that don’t pay, anyway?
Secret 2: Cap your stock levels
If your business carries any kind of stock, unless you’ve developed a simple system for stock control, you will almost certainly carry too little or too much of some product lines.
For many businesses, a quick stock-check will return a scary statistic. You may find that 80 per cent or so of your stock is six months to a year or more old, sitting on your shelves and simply hiding cash from you that’s no use at all when carried as effectively dead stock.
To overcome this, introduce a stock control system that minimizes the stock you carry whilst not jeopardising your service.
Check stock levels regularly for items that have not sold for the past three, six and 12 months. Build a list of items that you want to shift quickly and then do whatever it takes to shift it. At this point you are looking to recover cash, not to make much of a profit. So you can use a range of incentives to help get rid of it.
If items are hard to shift individually, you might consider bundling several items together to make an attractive package deal that still makes you some margin and mixes popular with less popular items to ensure everything goes.
A couple of other good alternatives are to shift the stock anonymously using eBay or hold some kind of customer event, where you invite customers to an end-of-season sale, or an annual stock clearance sale. These are not only effective, they can also make you very popular with customers too.
Whatever you do, manage your stock carefully to limit the amount of cash tied up on your shelves.
Secret 3: Stay on top of working capital
Working capital is the amount of money that gets tied up doing a job before you can sell it. So for a really simplified example, a builder may have to pay for the land, bricks, mortar, wages, etc before a house is sold. The builder needs to have enough cash to cover his costs and so must be careful to only take on jobs that he can contain within his available cash.
It’s a bit like holding stock, but this time it’s all about having enough money to finish the job. Many small businesses work on projects for customers that take a few months to complete. By dividing the project up into stages, you can bill regularly for the work done, keeping cash coming in and avoiding big holes in your cash flow.
This is another task that can be largely handed over to your bookkeeper. Have the bookkeeper track the work in progress and produce a bill at the end of each month to reflect the work completed.
The big secret to better cash flow
The real secret is that you have to get comfortable with the numbers in your business if you want to be successful at managing it. There’s no point working too hard and yet having no money left in the bank at the end of the month to pay yourself.
Take the time to become acquainted with your accounts and you’ll find it will reward you with more control and more money in your pocket.
Lee Duncan is the author of Double Your Business: How To Break Through The Barriers To Higher Growth, Turnover and Profit (Financial Times Publishing).
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