Having a healthy cash flow in business is incredibly important, especially for small to medium businesses. The Australian Securities and Investments Commission’s report into business failures found that 44 percent of failed businesses had inadequate cash flow or high cash use. The report, based on 8354 reports from external administrators, found small to medium-size insolvencies "dominated" insolvency statistics, with 85 per cent of the collapsed businesses having assets of less than $100,000.
The report found that small businesses are struggling with cash flow as it is taking longer to collect money.
Having a poor cash flow can bring your business to a grinding halt. You may find you can no longer invest into your business for growth, suppliers may refuse to provide stock due to late payments, and you may have to reduce the number of your employees. Eventually, a business with a poor cash flow will fail unless more cash is generated.
So how can you generate more cash in your business?
Do you know how much you spend?
Spending more than you earn will decimate your cashflow, as will selling your products and services at a loss. Although discounting can help you attract new customers, selling anything at a loss won't help you generate more cash in your business.
It’s important to know two crucial numbers:
* your cost base; and
* your profit margins.
Knowing these two numbers will help you to know whether you are operating at a loss, which will detrimentally affect your cash flow.
Loyalty is low cost.
It is six to seven times more expensive to attract a new customer than it is to retain an existing one.
Encouraging repeat business is therefore a less costly exercise than attracting new customers, and this can have an impact on your cash flow if you’re seeking to generate more cash.
You could consider loyalty programs, VIP offers and other frequent-shopper discounts, but make sure you’re aware of what you can afford to give away.
Are you hoarding stock?
Holding too much stock will tie up cash and increase storage costs. The balance between having enough stock to meet demand yet not too much that your cash flow is negatively impacted is important.
Keep your debtors honest
Failing to follow up overdue accounts is a common reason business experiences poor cash flow. Making sure your debtors pay you on time means you can meet your own obligations to suppliers and employees.
Have you got the right finance solutions?
Many businesses utilise products like bank overdrafts to manage their cash flow, but this product may not be right for you. Often overdrafts provide less cash than other solutions such as debtor finance, so think about investigating different ways of managing your cashflow. Options include debtor finance, where you are forwarded up to 80% of your outstanding invoices that you raise daily in cash; utilising a mobile EFTPOS device; and taking payments via your website.
Are there opportunities to increase income?
One of the reasons a good cashflow is so important to your business is that it lets you invest into growth – and therefore to increase your income. Have you reviewed your pricing in the last year or so? A big advertising campaign could also attract new customers, or you might consider increasing the number of products or services you provide. A healthy, positive cash flow allows you to grow your business, buy new stock lines or employ more staff to help your business to grow.
Reduce what you’re spending
Controlling expenses is another way your business can improve cash flow. Options include reducing power and water bills, minimising wastage and ensuring you’re not paying late fees or penalty interest because you’re behind in your payments.
How can you add value to the transactions your customers are already making? Perhaps you could offer complementary products or services at each transaction to encourage your customers to buy more.
Generating more cashflow in your business can be tough. We know that you’re busy attending to your customers and running your business, so it’s a relief to know that we can improve your cash flow, reduce the time spent chasing debtors and decrease your stress levels.
Contact us today to find out how.