Almost two in three Canadian businesses have faced cash flow crunches, keeping their owners up at night, according to a survey by Intuit QuickBooks. However, there is good news: you can take some steps to monitor and improve your cash flow. Read on to learn more.
What is cash flow and why is it important?
Every business need Cash. You must pay your bills and salaries to your employees. Even if you have no employees, you must pay yourself for your living expenses. Also, you may want to invest in new equipment, software, and purchase inventory.
You can generate a Statement of Cash Flow in your accounting system. This will tell you whether your cash flow is positive, which is a good thing. Basically, positive cash flow indicates that there is more money coming in (payments from customers) than flowing out (bills and loans being paid, employee salaries and your own cash needs).
On the other hand, a negative cash flow is cause for worry. It means that you have a low cash inflow and may not have enough money to cover your obligations.
Cash flow vs. profitability
Cash flow is different from profitability. Your company can be profitable and still have cash flow issues. For example, let’s say you just made a big sale to the XYZ Corporation. That’s cause for celebration but don’t count your chickens yet. You record your sale, and your income statement shows that you had a profitable month. However, XYZ is having cash flow issues and drags its feet on paying your invoice. After 30 days, you are still waiting to be paid, which means that you have cash flow troubles of your own. It’s difficult to pay your suppliers and employees. Even though your company is profitable, you are facing a cash crunch.
Tips for improving your cash flow
There are several ways to turn your cash flow positive. You can grow your revenues, collect receivables more quickly and manage payables effectively. Here are some ideas:
- Monthly subscriptions: One of the challenges of running a business is that your cash flow and income can be erratic, with great revenues one month and little the next. Can you get at least some of your customers to send you money every month through a subscription model? Let’s say you run a small gym or yoga studio. You can charge people per visit, or you can offer memberships that generate ongoing monthly income.If you go the monthly subscription route, you don’t have to reinvent the wheel and develop your own method of collecting and tracking payments. For instance, Plooto offers automated payments. It is great for monthly service packages, such as memberships, subscriptions and “product of the month” boxes. Best of all, it integrates directly with your accounting program (such as Xero), so your data is all in one place.
- Product bundles: Can you sell more by bundling 3rd party products and offering customers a discount for upfront payment? If your company provides pet sitting, perhaps you can pair it with dog-walking, grooming or even delivering pet food and treats.
- Customer contracts: Be clear with your clients about when you expect to be paid. If you want to receive an e-transfer within three days of invoicing, explain that to your client before you start work. If you are engaged in a long-term project, advise them that you will be billing twice a month. You may receive pushback from some customers, but others may be willing to help meet your cash needs. You can use both the carrot and stick – offer a small discount for quick payment or add a penalty for the slow payers.
- Invoice right away: Don’t wait until the end of the month to invoice. This will hamper your cash flow. As soon as you complete a service or ship a product, send the invoice immediately.
- Ask for cash or debit: When you get paid in cash, you avoid credit card charges and receive the money right away, aiding your cash flow. I have seen a small grocery store that has a sign asking customers to pay with debit card to keep a lid on rising food prices. If even a quarter of your clients heed your request, it will make a huge difference in your Cash Flow.
- PayPal: Services like PayPal help small businesses to get paid quickly. They allow customers to pay by credit card without you having to set up contracts with Visa or Mastercard. Once customers have paid, you can transfer the funds to your bank account, and it will arrive within a day or two. The catch? PayPal charges about 3 percent fee. Nevertheless, PayPal can help improve your cash flow dramatically, so the fees may be worthwhile.
- Overseas payments: If you have a lot of international clients, you probably already know that it’s painfully slow to collect payments. Again, be assertive as necessary. If you land a new international client, it’s perfectly fine to ask for payment (or partial payment) upfront. Services like Wise (formerly TransferWise) are great for receiving money from overseas clients. Wise can handle 10 different currencies and charges low fees.
- Automated accounts payable: Cash flow isn’t just about getting paid on time. It’s also important to manage your accounts payables effectively. You can automate your accounts payable function by using systems such as Xero, HubDoc and Plooto.
- Pursue online sales: If you are a brick-and-mortar business, consider what products and services you can sell online. It’s a great way to add revenue and secure clients outside of your immediate geographic area. Companies like Shopify and Squarespace makes it easy to set up an online ecommerce store. And payment tools like Stripe or GoCardless let you collect payments online or in person.
- Invoice factoring: If you are selling to large, reputed companies such as Walmart you may have a large accounts receivable. In such cases you may like to consider selling your invoices to factoring companies such as FundThrough or Liquid Capital. The factors will pay you immediately for your invoices and then do the work to collect payment from your customers. Of course, they charge a decent fee for this service. Therefore, you need to consider whether the benefit of factoring is higher than the cost involved.
- Value pricing: This is a way of pricing your goods or services based on the value that you provide to the customer. Instead of adding a markup on what you sell, consider the value you add. This allows you to charge higher prices and improve your profitability and thus cash flow.
- Automate customer payments: Online payment platforms such as Rotessa and Plooto let you dip into a customer’s bank account when their payment is due. You can set up one-time payments or recurring withdrawals. This helps your cash flow because it ensures that you get paid on time, every time.
- Proposal software: Several software programs such as Practice Ignition and Better Proposals help you to put together business proposals to send to clients. They save you time, help you to create beautiful designs without hiring a designer, and let you track acceptance with electronic signatures. The more proposals you can send the more revenue you can generate aiding your cash flow.
Depending on what type of business you have, some of these ideas may be more valuable than others. Nevertheless, there are probably two or three that speak to your needs and will help you to improve your cash flow.
At Bronte Bay, we’re always ready to help with expert guidance. We can analyze your situation, recommend software solutions and help you in monitoring your cash flow and profitability. Get in touch with us to learn more!