It’s the dreaded two-word phrase that can send shivers down the spine of most small businesses. You might be raking in customers left, right and centre, but if your cash flow isn’t what it should be, it can all end in tears.
In fact, cash flow is one of the biggest killers of small businesses. It’s something that has to be taken seriously, and through today, we’ll document four ways that you can do exactly that.
Don’t be too lenient with your payment terms to customers
You’re a new business starting out and need to make an impression. It can be tempting to offer ridiculously favourable payment terms to your customers. The problem? You’ve committed the first major cash flow error.
If you’re waiting 120 days to get paid for a service you’ve provided, four months have passed. During these four months, you’ve spent huge sums on your own expenses – and things are catching up with you.
Suffice to say, keep an eye on these payment terms. Ideally, you should never surpass the 30-day mark, although there are different norms for different industries.
It’s the same rules the other way around
You need to ensure that any strict payment terms align with your incoming payments. It’s no use being given 7-day payment terms by your own suppliers if you insist on 60-day ones for your customers.
There’s certainly a happy medium to calculate which will differ between industries. However, get this wrong, and you can be staring at the wrong end of a gaping cash flow issue.
Vet your clients before getting involved in lengthy commitments
This one is particularly important if you’re selling products or services that will involve a lot of work on your behalf. Getting swept up in the excitement of a new project can be easy, but you need to take a step back and vet your client first.
What’s their credit history like? How have they performed in the past? Are they likely to delay payment? The sooner you ask these questions, the better.
Of course, this doesn’t involve directly asking the party in question! Instead, you need to do your own research. Find out their credit scores, or if there are any rumours that they are a company that should be avoided at all costs. This is where industry gatherings are so important; they can provide you with these essential nuggets of information that can safeguard your business.
Keep on top of your invoicing
This might sound obvious, but you’d be surprised how many small businesses don’t adhere to it. Get into the habit of issuing invoices as soon as a job is completed. This way, you’re not waiting for weeks (or even months) to get the money you’re owed.
Moreover, if you’re using accounting software, you can set up reminders for when payments are due. This takes the headache out of it for you and also ensures that you’re not missing any payments.
It might also be an idea to automate your invoicing process. This way, you’re not relying on yourself (or your team) to remember to do it.