Cash flow is the lifeblood of any small business.
And that’s why it’s important to understand how to manage it effectively.
In simple terms, you always need to make sure that more cash is coming in than going out. Otherwise you won’t be in business for long!
And while generating more sales will typically lead to more cashflow, there are others levers which you can pull which can improve your cashflow without having to change your sales.
Let’s unpack these levers and see how they can help you improve your cash flow.
1) Timing of Payments
The first lever you can pull is timing. Cash flow is all about how much money is coming in versus what’s flowing out. To get positive cash flow, you want more coming in than flowing out, or the timing of the money coming in should be before the money flowing out.
You can change the timing of your payments by negotiating with your suppliers, vendors, or anyone you owe money to. For example, if you’re on a 30-day account term, can you negotiate to pay in 40 days (even if it was for a couple of key suppliers). This gives you an extra 10 days of cash, which can significantly add to your working capital.
2) Your Terms
The second lever is your terms. How quickly you get paid will depend on your terms, but also how well you follow up. If you can adjust your terms, you will get paid faster. For example, if your terms are 30 days from the end of the month, can you switch them to 30 day?. Of if they are 30 days, can you switch them to 14 or even 7? All this takes is some conversations with your current customers. Or if that is a bit tricky, you might just want to start with new customers only.
By shortening the cycle of when someone pays you, even if they’re paying you a little bit late, it will bring the timing of payment forward. You’ll have the cash sooner, which means your cash flow will improve.
And the key thing is when you have set terms, stick to them! Follow them up. Be the squeaky wheel. By focusing on these two things, will improve your cash flow significantly.
3) Your Speed of Invoicing
The third lever is the speed of when you get your invoices out. If you can get in the habit of blocking a little bit of time aside each day or each week to get your invoices out, you will get paid sooner, and that will improve your cash flow.
By focusing on these three levers, you can significantly improve your cash flow without having to generate more sales. Of course, generating more sales is always a good thing, but it’s important to manage your cash flow effectively, as it can make or break a business. So, if you’re struggling with cash flow, try implementing these levers and see how they can help you improve your business’s financial position.
In conclusion, managing cash flow is critical to the success of any business, and there are various levers you can pull to improve it. By focusing on timing, your terms, and your speed, you can improve your cash flow without having to generate more sales.