82% of businesses that fail say cash flow problems are a key reason why, Fundera reveals. Although improving your cash flow isn’t easy, it can help put your business in a stronger position now and into the future. A healthy cash flow situation ensures you have cash on hand to cover all your most pressing expenses, as well as helps strengthen your creditworthiness.
Set fast payment terms
Customers don’t always pay promptly after a sale. In fact, they pay invoices around two weeks late on average. If your accounts receivables are left to stagnate due to late-paying customers, this soon negatively impacts your cash flow. So, be sure to set prompt payment terms with customers. You can also ask for an upfront deposit (either partial or full payment) to guarantee you instant cash. Alternatively, offering a discount can also encourage a prompt payment – for instance, if customers pay within one week, they’ll get a 3% discount. Be sure to include this discount clearly on the invoice, so your customers see and act upon the offer. And, if a customer fails to pay their invoice on time, don’t hesitate to send a polite reminder. Late payment fees can also help here. If you decide to implement late payment penalties, be sure to detail this in your customer contract, as well as on the invoice.
Use loans when you need to
Although you may be hesitant to use loans, they can be a valuable source of capital that helps keep your business running smoothly. With a good business loan, for example, you’ll be in a better position to pay suppliers, partners, or employees on time. Invoice factoring is another useful type of business funding that can boost your cash flow. It essentially involves selling unpaid invoices to a lender – usually for around 70%-90% of its total value. This way, you’re not dependent on waiting for customers to pay in order to access the cash you’re owed. Once the customer does pay, the lender is reimbursed, and you’ll also need to pay them a service fee.
Check your accounts payable terms
By clarifying your account payable terms, you can better manage your finances to prevent cash flow problems. So, that means, stop making immediate payments where possible – instead, check the payment terms to see how long you’ve been given to pay. Negotiation may also be a useful tool here. Vendors and suppliers may be willing to provide you with better payment terms if you ask. Similarly, you can also enquire about an early payment discount to help save money if fast payment is something you’re in position to do.
All businesses encounter cash flow problems at some stage, but there are steps you can take to prevent them. By setting prompt payment terms, using loans when needed, and checking your accounts payable terms, you can successfully improve your cash flow and keep your business running smoothly.
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