Tricks of the trade: How to keep on top of your cash flow

Whether it’s a side gig or your full-time career, you’ve invested a lot of time (and money) in your business.

While you hope that your hard work will pay off, unfortunately many small businesses will suffer from poor cash flow at some point, which can inhibit flexible trading, prevent growth and ultimately lead to a failed business. Unlike big corporations, small business owners have very little flexibility when it comes to finances. Any change in profitability can have a huge impact – whether it’s for better or worse.

Cash flow problems account for the nearly half of small businesses that go under after five years. Solopreneurs are at even greater risk, since all aspects of running the business are their responsibility. To mitigate the issue, there are strategies that you can put in play early to address your cash flow problems.

It’s important to know the warning signs so that cash flow problems don’t come as a complete surprise. Be alert when it comes to debt – is it growing despite you making regular payments? In terms of money going out of the business, are you paying your bills late, or perhaps not at all? While reviewing your financial outlays, have a look at your credit rating to see where it stands, as you want to be in an optimal position at all times should you need to borrow additional capital.

Once you have reviewed the money going out of your business, shift your attention to the other end of the spectrum – do you have numerous outstanding invoices? This is detrimental to cash flow, as the more payments you are waiting on, the less liquid you become.

Should a few of these warning signs sound familiar to you, it’s time to act. To avoid late payment, always bill your customer as soon as possible after the job is complete. At this stage, they’re prepared to spend money on the services you have just provided. The longer you wait, the more likely they will have forgotten about it and allocated those funds to other expenses.

To encourage fast payment, you can make it easy for customers to pay by accepting as many forms of payment as possible. While cash and cheques still work they can easily be lost, take longer than necessary to process and aren’t as streamlined as a digital method of payment. Customers now expect to have the option to pay via debit and credit cards, which is beneficial to you as this ensures funds are received immediately, and income tracking is made simple by being able to store a digital record of the purchase.

If – despite having efficient payment methods in place – you are still battling outstanding invoices, it’s important to be organised. Look for troublesome payment trends such as customers who routinely pay late. Being familiar with these trends will create a better trajectory of your cash flow. To stay on top of your own expenses, stop the jumbled paper trail. Capture receipts digitally so they’re stored and organised for quick reference and make it a frequent habit so that your expenses are always up-to-date.

If you have mastered the art of getting your customers to pay on time but your cash flow is still lagging, do some research to determine if your pricing is too low. What are your competitors charging? Bump up your prices if necessary while still keeping the costs as competitive as possible.

Should you revisit the cost of your services, ensure that your customer relationship isn’t jeopardised by miscommunication when it comes to costs. Be as upfront as possible, as unexpected expenses on an invoice are one of the main reasons clients don’t return. Sometimes extra costs are unavoidable but make certain your customer is aware of these as unexpected fees can impact negatively on customer trust. The same goes for late payment terms – make sure the customer knows about potential late fees and send polite payment reminders if needed. You can also consider offering incentives for paying early.

Running a small business is hard, and it’s easy to get caught up in the work and ignore the crucial financial side of things. If you find your cash flow isn’t where it needs to be, scan for the warning signs and act now. If your cash flow is healthy, putting these measures into practice will help keep it that way.

About the author

Chris Strode is the founder and Chief Product Officer of Invoice2go, an invoice app for small businesses.