8 Changes That’ll Make A Difference To Your Cash Flow
There are over 250,000 small and medium sized enterprises in Ireland, employing almost 1 million people. Together, they generate an average of €66 billion in value added to the Irish economy, representing about a third of the overall total. We often hear politicians say that small business owners are the backbone of the economy, but it Ireland, it is literally true. But for SMEs in Ireland, cash flow is a major problem. 40% of Irish SMEs listed physical cash as their main concern, and 67% have issues with payments being made on time, according to the Close Brothers Business Barometer. Furthermore, half of Irish SMEs have been forced to lay off staff as a result of late payments, a worrying statistic considering roughly 71% of Irish workers are employed by SMEs. Clearly, maintaining a positive cash flow is proving difficult for many Irish businesses, so here are some changes that could make a big difference to your cash flow.
Establish a Clear Payment Policy
Although cash flow management is just as much about money going out as it is coming in, you can’t send money out if it hasn’t come in to begin with. Therefore, one of the most fundamental aspects of managing your cash flow is ensuring that you have a clear payment policy, and sticking to it. This means having a single document that clearly lays out all relevant information regarding pricing, payment methods, due dates, invoicing, and the terms and conditions for supplying your goods and/or services on credit. This should include the necessary criteria for customers to qualify for credit, as well as payment procedures, and punitive measures in the event of non-payment.
Keep Clear Documentation
Even with a clearly established payment policy, you will inevitably run into problems. Whether these are late payments, disputes over costs, or orders left unfulfilled, your first line of defense will always be a comprehensive record of all deals and transactions. This doesn’t just mean keeping a list of bills, purchase orders, and invoices, but ensuring that everything is sent to the right person, in a timely manner, and clearly illustrating who should be paid how much by what date.
Expense management company SAP Concur conducted a yearlong study and found that the average SME receives up to 6 duplicate invoices a month, with the average duplicate totalling about $2,000. This highlights the importance of keeping clear documentation, as it not only helps you be paid on time, but also helps avoid substantial overpayments and lost profits.
Monitor in Real Time
Real time monitoring is not only one of the best ways to improve your cash flow management, but also your financial modelling and business planning. Although there are now a myriad of services available for real time monitoring, the majority of these require subscriptions or pricey one-off payments, which may not be an expense worth incurring at the moment. But a simple Excel or Google Spreadsheet can help you achieve many of the same features, enabling you to see who your biggest customers are, which debts are outstanding, overhead costs, turnover, profit, and so on.
Real time monitoring can help you juggle all the necessary balls involved in running a business, without losing sight of any of them. Keeping a complete and comprehensive list of everything that will affect your finances is the only way to ensure you are getting a full picture of what is going on inside your business, which will ultimately enable you to identify any areas where you could cut costs or increase profits.
Use the FAST Standard
As mentioned above, clear documentation and real time monitoring are crucial to building a reliable financial model, but only if used with the correct methodology. The FAST standard is a set of guidelines that has been developed by modelling experts over the course of years, with the aim of making financial modelling easier and more accessible. FAST itself is an acronym for Flexible, Appropriate, Structured, and Transparent. In essence, this means you should easily be able to add, remove, or alter any information in the model; that the model is not cluttered with too much detail, thereby drowning out the more important points and reducing the model’s reliability; that you adhere strictly to a clear and logical structure; and that the information provided and formulae used are clearly presented and easily understood. To learn more, see this brochure published by the FAST Standard Organisation.
Another advantage of real time monitoring is that it can help you follow up on any payments you are due. Many new business owners can be wary about coming on too strong and are afraid of scaring off customers by chasing them for payments, but getting into the habit of being fair but firm is fundamental to your success. Make sure your invoices are sent out immediately, and that this is reflected in the spreadsheet, as well as the date payment is due. Sending reminders a few days before the due date, on the day itself, and if necessary, a few days after is a basic but effective way of shortening your receivables period. Another tactic, although one that should be given consideration before adopting, is to offer discounts to those who pay in the first week, as well as charging additional fees for late payments. Just be sure to include these clearly in your payment policy.
Encourage Repeat Custom
While it may seem obvious that you should want as many new customers as possible to come back to your business, it may not be obvious just how badly you want them. There are endless studies and statistics to back this up, such as the report by BAI/Kelsey & Manta, which found that 61% of SMEs get more than half of their revenue from repeat customers, while Bain & Co found that repeat customers spend 67% more by the third year of your relationship.
Repeat custom isn’t a quick fix for cash flow problems, but in time it can become the backbone of your business, so investing some time, thought, and money in encouraging customers to come back is a good long-term strategy. Loyalty programmes are a good way to start building up a relationship with your customers, with 75% of such programmes bringing in a positive return. But according to market research agency Rare Consulting, 86% of customers say brand loyalty is a matter of likeability, and 83% say it is a matter of trust, so the importance of building a relationship with your customers cannot be overstated.
Push Back-end Products
It is always much easier to sell a product to somebody who has already bought something than to start afresh. That’s why retail websites show things like “Other customers also bought”, and people ordering food online will often be prompted to buy a side, drink, or dessert. Once someone has agreed to part with their money, you are really just negotiating the value of your product or service. Something like a shoe polishing kit can have a much higher profit margin than a pair of shoes, and is much easier to sell to someone who has just paid a lot of money for an expensive new pair. If you are running a SaaS company, offering training days or online support can be an inexpensive way to upsell, and improve your customer service at the same time. Whatever your business may be, every sale offers insight into that customer’s needs and interests, so a broad range of back-end products allows you to seize that opportunity and increase the value of that sale.
Finally, you need to remember that cash flow is a two-way street, and just as there are always more ways to bring money in, there are always ways to stop money going out the door as well. Sometimes cost cutting is about reducing the impact of immediate costs, so a decision such as leasing a piece of equipment rather than buying it can appear to increase monthly costs, but has actually prevented you from incurring a major expense. Other times, cutting costs is a matter of taking a step back and re-evaluating your overheads. Things like stationary can easily be used and discarded excessively, so buying in bulk or implementing a new staff policy could cut costs there. Getting hit with fees for paying invoices late, or even just missing out on discounts by not paying them early, are examples of costs that are completely avoidable.
A major problem entrepreneurs face in cutting costs is that they often overlook certain costs because they are simply used to seeing them, but no matter what business you are in or how long you have been in it, there are always new ways to reduce how much you spend. Oftentimes, identifying these areas is simply a matter of looking at things from a new perspective.
Maintaining a positive cash flow is fundamental to the success of all businesses, big and small. Unfortunately, doing so is often harder for SMEs, which make up the overwhelming majority of employers in Ireland. But with the right combination of planning, innovation, and a firm hand can help businesses achieve this and lead them down the road to success.