By Viresh Harduth, Vice President, Small Business, Sage Africa & Middle East
Every small business owner knows cash flow is king when it comes to running a successful company. Yet, recent Sage research shows South African businesses face significant challenges in balancing their cash flow, so income is higher than their expenditure.
Among 313 leaders and financial professionals from 170 businesses, 48% said they face challenges in managing costs and cash flow, while 45% face difficulties in forecasting demand and revenue due to uncertainty. If you’re a small business owner, you’ll be familiar with the gap between your suppliers and service providers demanding payment and your customers paying you.
While the economy is tight, and many consumers and businesses are struggling to pay on time, there are several steps you can take to get paid faster. Here are seven tips for optimising cash flow in your business:
- Know and understand your cash flow
Your bigger customers may ask for generous 30- or 60-day payment periods, yet many of your large suppliers will expect to be paid cash on delivery. The result is that you may need to rely on credit cards, overdrafts and other forms of expensive credit to close the gap. Using your accounting software for cash flow forecasting can help you understand the flow of money in and out of your business so you can plan accordingly.
- Set out clear payment terms and conditions
A clear set of terms and conditions will inform customers when and how they must pay for goods and services, for example, within 30 days or upon presentation of the invoice, the penalties for late payment, and your payment details. Keep your terms and conditions short and friendly so customers can easily find the relevant information.
- Invoice accurately and on time
Sending out accurate invoices on time each month is the first step to receiving prompt payment. If you are late, you might miss your corporate customers’ batch run or your customers’ month-end online banking session. That will mean waiting an extra month for payments. Automated accounting software makes it easy to send quotes, turn quotes into invoices or invoice on the go. Also, be sure to provide the correct details and amounts (PO numbers, VAT registration, etc.), so your customers can pay without querying the bill.
- Make it simple to pay
The easier and more convenient it is for customers to pay, the quicker they will do so. Make payment options simple for them to pay, for example, via cash, card, EFT, debit order or mobile wallet. For recurring payments, debit orders are better because they mean you are paid automatically each month.
- Don’t let late payments slide
When a customer misses a payment deadline, send them a reminder via SMS or email. It can also help to build a good relationship with someone in the customer’s accounts team, so you can follow up on late payments.
- Ask for prepayment or a deposit
When taking on big projects or orders, you should ask for a deposit or prepayment, especially if you don’t know the customer. You can get a business credit report for a company from a credit bureau like Experian and make an informed decision based on its credit record. In general, small businesses should avoid extending large amounts of credit to individual consumers. Don’t think about doing this without checking their credit scores.
- Make wise use of credit from your vendors
Unless you’re getting a discount or incentive for early payment, delay settling your bills according to your vendors’ terms of payment. If your credit terms are 60 days, rather keep the money in an interest-bearing account than pay early. But don’t be late with payments either to avoid harming relationships and paying interest on late payments.
Avoid negative cash flow
Wise business owners manage cash flow as carefully as they do sales and profits. When more money is going out of your business than coming in, you have a negative cash flow. While this could sometimes be because of external factors beyond your control, you can often take steps to bring in more money and delay outgoing payments, thereby avoiding the dreaded cash crunch.
