Small business owners will tell you that they would much prefer to overcome a cash flow crunch without a cash flow loan.
A cash flow crunch in small businesses can seriously disrupt a business.
When invoices are not paid to suppliers, suppliers can disrupt the inputs necessary for the production of goods and services in the business, which in turn disrupts revenue (and often the reputation of the business). When the reputation of the business is affected, sales and revenue can diminish substantially, and then suddenly, things can go down hill very quickly.
In Australia, poor cash flow management kills 90% of all small businesses.
However, this does not always mean that cash flow loans are the only solution. Businesses should adopt good cash flow hygiene and sound practices around cash flow management.
Here are our top nine (9) tips to overcome a cash flow crunch and hopefully save you from seeking a cash flow loan:
1. Send invoices immediately
Send invoices to your customers immediately to signal that your business is serious about keeping the cash flowing in your business. Your customer will come to respect that the way you conduct business is professional and enhances their opinion of your business.
Conversely, if a business does not practice good invoicing hygiene, customers will draw the wrong conclusions about the services and products you deliver (and oh yes, they take longer to pay too).
2. Build a month-by-month cash flow forecast
Build a month-by-month cash flow forecast for the next 12 to 24 months. By doing this, you will understand your future cash situation, and take early action to plug possible cash flow gaps. By taking early actions, you may also save money on borrowing costs, prevent disruptions to the business and preserve your business reputation.
3. Offer incentives for upfront payments
Offer small incentives, such as a discount to customers for upfront payment. Depending on the type of business you are in, you can be creative with this. For example, for customers who opt to pay upfront, you can reward them with special access to exclusive offers or products.
4. Conduct customer credit checks
Much of the work you do to chase up on unpaid debts comes only from a handful of customers. Hence, do your homework and run your normal credit checks on prospective customers. To further protect your business:
Only offer credit terms after the customer has proven themselves from paying upfront over an agreed period
Request that the customer signs a personal guarantee
Ask the customer for a personal assets & liabilities statement as part of the credit application process
State clearly in your terms & conditions the actions you are allowed to take if they do not meet the agreed payment terms
Set credit limit at the lower end of the scale. You can always review the credit limit later on, or at the end-of-the-financial year.
5. Ask your suppliers for extended terms
You can also improve your cash flow by asking for extended terms from your suppliers and choosing suppliers that offer extended trading terms.
6. Leased or hire purchase assets
Refrain from buying equipment and big ticket items from the business cash flow. Leased or hire purchased assets free up cash flow and are more tax effective. Alternatively, use equipment and asset financing.
7. Identify and discount slow-moving inventory
For small businesses that have to manage inventory, slow-moving or dead inventory tie up cash flow in the business. Discount slow-moving inventory in exchange for immediate cash. You may have to sacrifice margin for cash, but it is still cash you can use to keep the business going.
As a strategy, it is important to identify, manage and ultimately prevent slow-moving inventory in the business.
8. Use a debt collection agency
Small businesses are likely to need specialist help around fixing overdue accounts ad/or collecting unpaid invoices. Debt collection specialists are more efficient and knowledgeable around invoicing and collecting bad debts. You can also take your mind off chasing debts, and focus your efforts on the business.
Enforce your own credit terms and conditions agreed to by your customers, and use a debt collection specialist when the bad debts are unresolved over a certain period of time. You might incur some expenses in using these specialists but they can help to improve your cash flow and minimise your need for a cash flow loan.
9. Make it easy for your customers to pay you
Offer different ways for your customers to pay you. Provide your PayID number as well as the usual BSB and bank account number. Accept payment options such as credit cards, PayPal, AliPay, Wechat Pay, cash, AfterPay, ZipPay, Stripe and more. Some payment options incur higher transactional fees for the merchant. It is better to pass on these transactional fees to the customer than to let bad debts languish in your books.
Cash flow loan
Despite best efforts at good cash flow management, sometimes it is inevitable and necessary to apply for a cash flow loan to keep the business functioning, especially during the growth phase. Once a cash flow gap is identified and forecasted for the future, small business owners should seek funding early to keep the cost of borrowing lower.
Some common cash flow funding options may include:
Business term loan (typically larger sums over longer term)
Asset financing
Equity cash out (from residential or commercial real estate)
Invoice financing
Personal loans
Vehicle Loans
By using cash flow forecast, business owners are able to understand their cash flow needs into the future, and whether they require cash flow funding. Cash flow funding and cash flow loans are one of the many tools in sound cash flow management, and should be used strategically along side other techniques to manage cash flow effectively.
There's more than one way to nurture your business
We love helping businesses grow with the latest info and ideas to educate and inspire. We can also guide you to a funding solution to help bring those business dreams to life
The information on this website is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal and taxation advisers. Although every effort has been made to verify the accuracy of the information, we disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.
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