Although business profitability is vital if your business is to survive long term you must also ensure you have a healthy cash flow.
Even very profitable businesses fold through lack of funding especially if you are working on long term contracts like Civil Engineering projects.
Some Civil Engineering projects run for many years and will only be awarded to businesses that can demonstrate they have the required cashflows to complete the project. This might seem obvious to you for a project that takes years to complete but it applies to all businesses and is an area where many fail.
It’s imperative that you adopt a routine cashflow forecasting procedure which will vary from daily, weekly or monthly depending on the type of business you are running. For most businesses a detailed monthly forecast should suffice but without a forecast, it will be very difficult to establish even the basics of payment terms.
Once you have completed your cashflow forecast ensure you set acceptable payment terms with your suppliers and customers. Many businesses simply adopt the same terms for both suppliers and customers without considering the consequences. If for example you agree 60 day terms with your suppliers and 30 days with your customers your cashflow will be much better than 30 day terms for both.
Persuade your customers to provide some of the funding in the form of a deposit for large orders. Not only will it improve your cash flow but it will also help with your credit control and keep bad debts to a minimum.
Some businesses seem to think that stage payments only apply to contracts that run for years but this is not the case. Take the example of a builder constructing an extension for a client that might take 3 or 4 months to complete. It’s commonplace for payments to be made when various stages are completed like foundations, brickwork, electrics etc.
Providing your business is profitable your bank should be able to provide you with corporate credit cards at reasonable rates but shop around to ensure you are being offered a competitive rate.
Leasing will generally increase your business running costs but this might be acceptable if it provides a significant boost to your cashflow. Again shop around for the best rates and check the terms for exiting the agreements early should your cashflow improve unexpectedly.
You might want to consider offering a small discount for early payment to customers that you know are cash-rich if the discounts are smaller than the interest rates you pay on alternative financing.
Not all of your customers will be cash rich though and some will be struggling with their own cashflow problems. One way to combat this is to check out invoice factoring where a third party pays you promptly for your goods and the factoring company collects the debt from your customer.
These are just a few simple tips to help improve your cash flow but don’t be afraid to discuss any problems you have with your bank, suppliers or customers. They will generally be quite supportive and most of them will have experienced similar problems at some point in the past.
Tammy Richards is a seasoned finance writer with over 15 years of experience in the industry. With a keen eye for detail and a passion for helping people make smart money decisions, Tammy has become a trusted voice in the world of personal finance. Holding an MBA and drawing from her extensive entrepreneurial background, she offers valuable insights and practical advice to her readers.
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