One of the most important ways to keep your business healthy is to ensure positive cash flow. Under normal circumstances, this is not a problem, but due to the Corona crisis, it has become harder for businesses to maintain positive cash flow. For this reason, we have listed 6 ways to make sure there’s more cash coming in than going out.
Before we go down the list, we advise you to take a good look at, or make, your business’ general overview of cash outflow and overheads. On that basis, you can determine if you really need those costs or if you need to negotiate on, for instance, better utility, (cell)phone or internet deals, or better deals with suppliers. Only by taking a good look at your business expenses, you can determine where there are opportunities to improve cash flow.
1. Avoid big discounts
When sales go down, it’s easy to try and ‘solve’ the problem by offering big discounts and hope that sales go up. However, a generous discount doesn’t guarantee that sales will go up – certainly not in a crisis. What it does guarantee, is that profit will go down, which in turn will affect your cash flow negatively. On the other hand: what you could do to positively affect cash flow, is offer a small discount to clients willing to pay immediately instead, or to clients that are thinking of buying a bigger amount of your product or service.
2. Stay on top of receivables
How many outstanding accounts does your company or organisation have? And what is their total value? Chances are that it’s quite a large amount, which is bad for cash flow since it represents money that’s unavailable to you. So, to maintain positive cash flow, you should always manage your receivables closely and put some extra effort into keeping the amount of overdue money as small as possible. Especially during a crisis, every penny is worth the effort.
Especially during a crisis, every penny is worth the effort
3. Use technology to track cash flow
Staying on top of and keeping track of your business’ cash flow is key in maintaining positive cash flow. There are several ways to do this, but we advise you to use accounting software that’s specifically designed to track cash flow. In most cases, this kind of technology also offers real-time insights that’ll help you with budgeting and managing cash flow, as well as keeping an accurate account of what is coming in and going out, expected and projected cash flow, et cetera. In short: investing in the right software allows you to maintain positive cash flow.
4. Get customers to pay faster
Businesses that require customer deposits and advance payments generate cash in advance of spending cash to deliver the product or service. Therefore, structuring contracts to require pre-payments is an excellent way to enhance cash flow. Another way, as mentioned earlier, is providing incentives to customers to pay on time or early. Receivables paid in 15 days or less significantly enhance cash flow, while those paid in 60 or more days drastically decrease cash flow.
The goal is to make your monthly cash flow as smooth as possible
5. Negotiate terms with vendors and suppliers
Most businesses focus on keeping accounts receivable as low as possible, but what about maximising the potential of your accounts payable? Especially when you’re not the only business facing a crisis, it can be good to negotiate more advantageous terms or pricing with your vendors and suppliers to improve cash flow. There are several things you can do, like negotiate invoice terms, spread out accounts payable by matching payments to deliverables, or create appropriate terms that sync up with accounts receivable. The goal is to make your monthly cash flow as smooth as possible.
6. Invoice financing
If staying on top of receivables (tip 2) doesn’t pay out, you could consider financing invoices. In that case, a financial services provider pays you the amount per outstanding invoice in advance, so you don’t have to wait on the debtor’s payment. Of course, there are fees to consider, but nevertheless, staying away from cash flow problems and sleepless nights should be worth something.
In the UK almost half of all invoices are paid late, causing businesses cash flow problems
Government support to maintain positive cash flow
Due to coronavirus, the UK government has decided to help businesses manage their cash flow by offering the option to defer all VAT payments (without charging interest or penalties) due between 20 March 2020 and 30 June 2020.
If you choose to defer your VAT payment as a result of coronavirus, you should cancel your Direct Debit through your bank as soon as possible so that HMRC will not automatically collect any VAT due. You can cancel online if you’re registered for online banking. You do need to reinstate the Direct Debit by 1 July 2020.