Having a positive cash flow is critical for the long term financial sustainability of your business. Yet many businesses find themselves having to plug gaps in their cash flow, which can mean that opportunities for growth and investment are missed. The reason for this is simple: the cash owed to you is not being paid as quickly as you have to spend it.
Many businesses have cash hidden in their business that if unlocked, could significantly improve their cashflow position.
In our last article (Click here to read What is Cash flow Part 1 of 3), we discussed what cash flow is and why it’s so important to the health of your business. But do you know how to calculate your cash position? Do you know where cash might be trapped in your business?
Where Cash Is Hidden in Your Business
Employee costs can comprise a significant portion of your expenses – and in many cases, great people are worth it. However, there are some ways you can retain excellent employees and free up cash in your business.
Outsource work where possible. Rather than hiring full-time employees, consider independent contractors to do the work. You will save the obvious cost of fulltime wages, superannuation and leave costs, and because you’ll hire someone who is already an expert, you will also save on employee training.
One example is to outsource your accounts receivable. Outsourcing accounts receivable helps to lower the indirect costs associated with trying to do it all yourself: reviewing your suppliers, making follow-up phone calls and missing discounts or opportunities for growth because your cashflow is suffering. The responsibility of managing the accounts receivable is done by experts, and so there is no need for a full-time accounts receivable resource in your business.
Reviewing where your business is spending money is a good way to free up cash in your business.
Lease instead of purchase. Rather than purchasing expensive equipment, machinery, cars, furniture and other large items, consider leasing them. Your cashflow won’t take such a big hit when you need to upgrade and your cashflow will be less volatile – you can plan around fixed monthly payments.
Renegotiate contracts. Shop around to make sure you’re getting the best deal for your insurance, electricity, and utilities providers.
Review Your Invoicing
You may find some hidden cash hiding in the way you issue invoices, which can be easily adjusted to free up cash.
Make invoicing a priority. The sooner you send out invoices to clients, the sooner you’ll get paid—in most instances, it really is that simple. Prioritizing invoicing doesn’t just mean sending out bills in a timely manner. It also means following up on any invoices that are overdue.
Shorten customer terms. When you offer terms to your customers, you give them an interest-free loan rather than keeping the cash to run your business. If you currently allow your customers 60 days to pay their invoices, change the term to 30 or 45 days if you can without losing their business.
Ask for deposits. Rather than financing the total amount, ask your customers to pay a deposit to help free up some of your cash. This may be particularly good practice for new customers or big projects that expose your business to a higher level of risk.
Offer discounts for early payment. By offering your customers a small discount to pay their invoices before they’re due, you will increase your cash flow. You are less likely to experience those gaps in cashflow if your customers pay you early.
Make payment convenient. By showing you are flexible and want to make it as easy as possible, you increase the likelihood that your customers will pay on time. Do you offer online payment options or accept credit cards?
Use negative reinforcement where necessary: This negative reinforcement tactic can be in the form of a late fee added after a late payment. The message is you are not willing to accept untimely payments.
Have a collections policy. Establish a fair collections policy in advance so that you know how to resolve a negative situation if it ever occurs. Most businesses are very cooperative with paying their bills if there is open communication.
Negotiate with Your Suppliers
By negotiating with your suppliers, you may be able to find some extra cash.
Negotiate longer payment terms. Just as you can change your customer payment terms to free up some cash, you can request a change in your supplier terms to do the same. This will allow you to keep your cash longer, which will contribute to your cash flow.
Take advantage of early payment discounts. You can further reduce your costs by asking suppliers for an early payment discount.
Ask for better pricing or buy in bulk. Often, you can negotiate with suppliers for a better price if you are a consistent customer or if you are able to buy in bulk,
In many instances, businesses have a lot of cash tied up in inventory sitting in warehouses.
Turn over your inventory. The longer your inventory sits on shelves, the less cash flow your business has. Reduce the time it spends on the shelves by properly forecasting your needs, taking into account special sales, seasonality, and one-time events.
Consider product lines. It may be worthwhile to get rid of under-performing product lines and reduce the number of products you sell. Conversely, diversifying your product line may improve your cashflow by giving customers a greater choice. Consider your product line regularly.
Understanding which sale items generate the highest margins and then directing your marketing activities to these items will improve both cash flow and profit. Other tricks of the trade include bundling sales and upselling to increase sales volume and cash flow.
Do you know where cash in trapped in your business? Do you know where to start looking for the hidden cash that can improve your cashflow?
We offer a free report that can help you unlock the hidden cash in your business. Contact us now to find out more.
If you’d like to understand how much cash flow it is costing you each day your invoices go unpaid , make sure to use our tool to calculate your position. It might make the world of difference to your business!