How To Protect Your Business's Cash Flow
These are unprecedented times. Your business’s income might not be steady, and perhaps many of your clients are experiencing similar issues, causing them to make late payments, or not to honour your agreements at all. Not out of spite, of course, but simply because of hardships of their own. Or you might just work in an industry with long payment terms. It’s nice to see the influx of money on paper, but in reality, what happens when you need it now?
You may not be able to influence others’ payments and market fluctuations, but you can try to protect your cash flow and ensure you stay afloat in the upcoming months. Here are a few tips on how to do just that.
Do a Thorough Assessment
In order to gauge how your business is doing, you have to be aware of your accounts receivable (what you’re owed) and your accounts payable (what you need to pay). It’s a good idea to monitor leads as well as conversions, your average sales, and days of cash on hand, along with the two factors above.
Get your accounts in order and assess exactly what your expenses are in the foreseeable future (ideally a year, but six months at the very least) and how much you’re expecting to earn. You can base this off of the invoices that are still unpaid, but also forecast how much you might be able to earn on average based on your last few months of earnings.
Put these calculations onto paper (or in an Excel/Google sheet). Keep track of what you owed and what you owe. Then continue to plan.
Prepare Cash Reserves
Once you’ve gathered all the data into one place, you will have a good sense of if and how you can save some money. Bear in mind that cash flow isn’t just about the cash coming into your business - it’s also about the cash going out. Remember, you’re largely in control especially of the latter.
You might be able to cut back on some costs (prioritise!), create additional services, or perhaps collect some receivables. Do what needs to be done to create some reserves for the upcoming months. It’s a good policy even in personal finance to have a few months’ salaries saved up in case of an emergency. The same rule could be applied to businesses.
Compress Your Cash Flow Cycle
A cash flow cycle begins when you get a new lead and ends when they make their first payment. Ideally, in times when you’re in need of relatively fast earnings to keep your business going, you’d want to encourage your clients to pay as quickly as possible, or at least regularly. Signing up clients for a couple of months in advance, regularly checking up and sending out invoices (and following up on said invoices) can all positively affect the duration of this cycle.
You can create incentives for clients to pay on time or in advance in the form of discounts for special services and offers. Get creative about it.
And perhaps most importantly, be wary of your payment terms. Extending net-30 terms to clients is a common practice, but one rarely implemented properly. You forget to follow up, they forget to pay, etc. Be diligent about this and you will have a much steadier stream of income.
If push comes to shove, however, you can always hire an experienced legal firm such as MJW Law to help you chase down those debts. We’re hoping it won’t come to that, but in case it does, you’ll be ready.
Protecting your business’s cash flow is a combination of forethought and planning, some action and some preventative measures. Combine them all into a smart strategy and you’ll be able to continue turning profits even in the ensuing months.