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.
10 Tips To Keeping A Positive Cash Flow
The term “cash flow” refers to any money that moves in or out of a business. Maintaining a positive cash flow means keeping more money coming in than you have going out. This is essential not only for the end result of making a profit, but also for enabling your business to run on a day-to-day basis. Cash flow is essentially a barometer for the health and success of your business, so here are 10 tips to keeping a positive cash flow.
1 - Track Everything
From the very beginning, you need to get into the habit of knowing exactly where every bit of money related to your business is coming from and going to. One of the most important aspects of making a business successful, particularly a new business, is making sure that it is running efficiently, and this can only be achieved by keeping as close an eye as possible on your finances. This will help you identify your most popular and profitable products, and enable you to make well-informed business decisions based on fact.
2 - Identify Negative Trends
Another advantage of comprehensive financial monitoring is that it allows you to identify and address any negative trends. Without keeping track of which products or services are selling and which are not, you might get a general idea of what your customers do or do not like, but it will never paint as accurate a picture as numbers on a page. Furthermore, you may find that certain products or services are selling, but are actually running a loss when all things are taken into account, such as storage or delivery costs. Rigorous financial tracking can reveal trends that you otherwise simply would not see.
3 - Test the Bang for your Buck
With all that being said, you should also bear in mind that just because something is not running at a loss does not mean it is running as efficiently as possible. For example, LED bulbs cost about 4 times more than normal light bulbs, which puts many people off buying them. But not only do LED bulbs lower your energy bills, they also last about 15 times longer, and should pay for themselves in about 6 months. Alternatively, you likely use some sort of software in your business, whether that be for mailing, payroll, or EPoSS (electronic point of sale software). There is such a wide variety of options for all of these today that different brands offer different features according to their own pricing structure, and by shopping around, you may find one that is better suited to your needs for a similar or even lower price.
4 - Save Some for a Rainy Day
The term cash flow refers specifically to the movement of your money, but the flow of cash is not as reliable as the flow of the tide. There will be times when you do not have as much money coming in as you normally would, such as unpaid invoices, lost clients, or seasonal lulls. But while you may not always have money flowing in, you will always have money flowing out to things like wages and utility bills. Since these are necessary expenses, without which the business cannot function, you need to build up some sort of rainy day fund to fall back on, or you run the risk of being unable to bring cash in, even when the customers come back.
5 - Use Discounts and Late Fees
Anyone who issues invoices will tell you that getting them paid is a lot harder than you might expect. Even if they are issued to big corporations that can afford them, or people with whom you have a good relationship, you will inevitably find yourself chasing after them on more than one occasion. One way to curtail this is by offering discounts on early payments, and charging fees for those paid late. The ability to save some cash, or the threat of losing some unnecessarily, are surprisingly powerful incentives, and can save you a lot of time, anguish, and inconvenience.
6 - Take Deposits on Large Orders
Receiving a large order is very exciting for any business, but there is always the risk that the order will fall through. If this happens, it can be a devastating blow, which is why it is so important to ask for a deposit upfront on large orders. The obvious advantage to this is that it lessens the damage dealt to your business, but it could also mean that you are able to sell on any stock you may have invested in so far to another client at a discounted rate, or maybe even full price, which will increase your profit margins on that stock. Furthermore, customers are far less likely to drop out of a deal if they have already invested in it, as they will often prefer to get something rather than nothing in return.
7 - Provide Clear Payment Instructions
You should always remember that nobody cares about the money you are owed as much as you do, even if they’re the ones who owe it to you. While a good business owner will always know how much they owe and to who, the reality is that not everyone pays as close attention to this as they should. By providing clear payment instructions, you minimise the risk of people forgetting what they owe or misunderstanding when it is due. Invoices should be issued as soon as possible to allow for any disputes to be resolved early, and email reminders should be sent a few days before, on the day, and a few days after, if necessary.
8 - Reschedule Payment Dates
Whether it’s coming in or going out, cash never really stops flowing through a business. Ideally, you want that flow to be as steady and predictable as possible, and avoid situations where you are hit with a sudden wave of expenses at one part of the month, and a surge of income at another. This could lead to a scenario where you owe a lot of money, but know you won’t have any coming in for several weeks. Arranging your outgoing and incoming payments so that they are spread evenly across the calendar gives you a lot more flexibility and security, and also makes it less likely that you will spend frivolously.
9 - Use Credit Wisely
Although you always want to have some sort of rainy day fund, having a line of business credit to fall back on can be an added layer of security. But credit can be a complex thing, so you want to start thinking about it before you need it. Even if you have cash to burn, paying your expenses with credit and then paying that debt off on time helps you establish a good credit rating. When doing this, your best option is to maintain a low credit utilisation ratio, which means using only a small percentage of what you are entitled to use (ideally under 30%). This demonstrates that you are a responsible spender and reliable debtor, which will make it far easier to increase your maximum limit in the future.
10 - Consider Outsourcing
While all business owners, especially new ones, want to keep their expenses as low as possible, you need to look at this in terms of how much your time is worth. If it takes you the better part of a day to do your own payroll, you have to consider that you could be spending that time bringing more cash into the business. If the amount you could make in sales is far greater than the cost of outsourcing to a payroll company, refusing to do so is simply a short-sighted decision.
Maintaining a positive cash flow is something that will always be at the forefront of a business owner’s mind, but doing so means looking at a lot more than just the bottom line. Although profit is the ultimate goal, this can only be achieved by looking at the day-to-day decisions you make. In the end, there are countless factors that can affect your cash flow, but the topics laid out above are some of the most impactful, and remembering these will make it a lot easier for you to achieve a positive cash flow.