From working with many small business owners over the years, one of the key things I’ve learnt is how all businesses, across all sectors, including consultancies and professional services companies, are dependent on cash in the bank. Cashflow is vital even if you have a profitable business and a great business model.
One in five business owners indicate that cashflow issues are the norm rather than the exception so if you find yourself struggling then you’re certainly not alone.
There are many different issues that can cause cashflow problems but so long as you have a profitable business plan these can all be solved and there are some key things that you can do as follows:
1. Put In Place An Effective Credit Control System
This does not need to be complicated.
Firstly you should credit check potential new customers and a quick and easy way to do this in a couple of minutes is by using online tools such as Creditfocus or Creditsafe or similar. This will reduce the likelihood of taking on board clients that are unlikely to pay you. Then, don’t offer any one client too much credit to leave you exposed to a potential bad debt.
You should use some decent accounting software where you can quickly and easily invoice your clients as well as automatically setting in place invoice reminders at planned stages.
You should issue your invoices promptly to clients and agree short payment terms in your agreed contract – there’s no need to offer 30 days payment terms, these terms are up to you and I’d suggest 7 days if you are offering credit.
Plus, always negotiate longer payment terms with your suppliers as you feel appropriate.
2. Use A Direct Debit Service To Collect Payments
For consultancies and professional services companies in the business to business sector using a direct debit provider to collect payments is a fantastic thing to implement that can transform your credit control and cashflow. We recommend GoCardless and have used it for years with superb results, as have many of our clients.
Once you have your clients on direct debit then payments can be automated or raised manually for varied amounts and you can predict exactly when your revenues are arriving into your bank account. So you’re not reliant on the whim of when your client gets round to paying you and don’t need to spend lots of time chasing payments and worrying about when debts are going to be settled.
3. Keep Your Books Accurate And Up To Date
It may sound obvious but if you don’t keep your bookkeeping records up to date then how are you supposed to be able to predict what’s going to happen with your cashflow? You really need to know how much you owe, when you should be paying, how much you are owed, and when you are going to receive the amounts due. This is key since you can’t see what’s going on without accurate bookkeeping records as a minimum. Having out of date financial records is not much use to you when you’re focussing on cashflow.
4. Focus On Cashflow Management As Well As Profits
Of course, ultimately you want your business to make good profits but good cashflow is vital to keep the company going to allow you to build those profits and successfully grow the business.
So you’ll need to keep a regular eye on cashflow and produce regular cashflow statements to keep in full control of things and to effectively plan your growth. You should use good accounting software capable of producing clear cashflow statements and use the expertise of your accountant or business advisor where needed.
5. Build A Cash Reserve Or Have An Accessible Line Of Credit
Ideally you’ll want to have some sort of cash “buffer” in the bank to ease through any tricky months but if this isn’t possible then you should make sure that you have some back up line of credit such as an overdraft or company credit cards already in place. Then you don’t need to stress as much if there are short periods where things are tight.
6. Consider Raising Your Prices
It’s obvious that increasing your revenue will improve your cashflow but increasing your revenue you may think is easier said than done. Clearly raising your prices will increase your revenue (as well as improve your profits) and it’s something that can be implemented quite quickly without affecting how you run your business. Pricing isn’t an exact science and your customers may well be prepared to pay you significantly more than you think if you’re providing a valuable service offering. It’s something you could easily test on some of your services if not the whole spectrum, or on a sector of your customers.
Adding additional new revenue streams from new service offerings (perhaps to existing clients) is also something that could of course increase your revenues and hence improve cashflow.
So if you’re one of the many small business owners who experience cashflow difficulties from time to time you can see that there are many things that you can potentially do to overcome the problem. Make sure you don’t bury your head in the sand and hope things will get better. Take action, focus on 1 or 2 or more of the points above and solve the problem right away.