How to Increase Cash Flow in your Business

By | February 20, 2015

Most small businesses experience cash flow problems from time to time and urgently need working capital. Many business owners immediately think of the bank or loans when they’re short of money. But there are other resources you can tap before you ask for that expensive overdraft or overdraft extension. The money you need might already be there—locked  in your debtors’ book.

Debtors

Are you letting some customers have the free use of your money for months? This is a common occurrence in small businesses where the owner(s) are so busy getting the business off the ground, products out the door, or services completed, that they don’t pay enough attention to basic business procedures. Many customers will take advantage of this ‘free money’. But your business is not to serve as a free bank.

Here’s how you fix the problem:

  • Get invoices out promptly. Whatever else you do, become efficient at getting invoices out early. This is your future cash flow—the lifeblood of your business! You want to receive it as soon as possible. Start this new system NOW. Depending on your business, you can often cut out statements simply by printing at the bottom of the invoice: ‘Please pay on this invoice as no statement will be sent.’
  • Send the invoice with the goods or immediately the service is completed. Date the invoice from no later than the day it is sent rather than following the standard ‘last day of the month’ date for invoices. The earlier the invoice date, the better your chances of getting paid earlier.
  • Change the terms for some of your customers, or for new customers. For example, can you reduce ask for immediate settlement or set reduced payment terms such as 7 days or 14 days from date of invoice?
  • Follow up promptly when invoices aren’t paid by due date. This is critical. Be polite but firm. If you haven’t the time to do this yourself, then appoint someone to do it for you.
  • Monitor your debtor collection days and set an improvement target each quarter. For example, can you find out the benchmark standard for your industry? IF the average in your industry is 30 days, but you are taking an average of 45 days to collect outstanding debts, then there’s clearly room for improvement. If your customers or clients have been taking advantage of you because of your previous laxity in invoicing, then you may need to re-educate them. Do this politely so you don’t offend customers:

With the use of cloud accounting technology your debtor management can be automated.  Imagine if you could customised a template that can be automatically emailed to your clients who have not paid by the due date, and set reminders to go out just before the due date, right after and at intervals right up to the dreaded “Final Demand”. Let’s hope it doesn’t get to that though!

Feel free to contact us on info@ataccountants.com.au for more information.

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