Money comes in, money goes out. That’s probably the simplest way of explaining cash flow. And in a perfect world, you’ll always have money coming in, like your customers paying you on time, before the money goes, to buy more inventory, for example. But as you know, the world isn’t perfect, and cash flow isn’t either.
(If you’re reading this and feeling lost, check out our handy little cash flow handbook first.)
So what can you do to manage your business’ cash flow like a boss? Here are a few tips that can get you headed in the right direction.
1. Negotiate with your vendors
Devesh Dwivedi, a Calgary-based business coach, recommends that business owners negotiate longer accounts payable periods with vendors and suppliers.
“A longer accounts payable term helps you keep a healthy cash flow, and gives you more breathing room and spare cash to reinvest in your business,” he says. “Make sure you also discuss volume discounts and lock in your prices with your suppliers. This can help safeguard you from future price hikes.”
2. Build a subscription-based product or service
Another recommendation Devesh shares to help entrepreneurs maximize their cash flow is to build a subscription-based product or service, or offer customers a monthly payment option.
“Having ten or even 100 people giving you a set amount of money every month is much easier than having to prospect, sell and collect all the time,” he explains, “this method is much more hassle-free and cash flow friendly.”
“In a subscription-based model, your monthly billing ensures cash flow is consistent, and while of course you have to deliver value on a monthly basis to keep your subscribers happy, you won’t have to hunt for new clients all the time just to maintain a consistent cash flow—especially once you’ve built a solid subscriber base.”
3. Offer early payment incentives
One way to motivate customers to pay invoices early is to offer them a discount as an incentive.
“It might be as little as two percent, but if your invoices are large, your customers will appreciate the savings,” says Andrew Patricio, founder and CEO of BizLaunch, “The discount does, however, need to be enough to instil change. If two percent isn’t getting you any early birds—go up. It’s better to lose a little to get paid on time than to be paid the full amount late.”
Similarly, you could consider a disincentive. “For late payers, charge a small fee and increase it as that time period grows,” Andrew explains, “If you have a client or two who consistently pay really late, this may be a wake up call to pay better attention to their accounts payables.”
4. Make a plan
Michael Yakymishen, Relationship Manager at ATB Sherwood Park, believes that the difference between a dream and a plan is that a plan is something you have written down.
“When it comes to all aspects of your business, a plan is very important. A regularly used plan becomes a blueprint for your business—whether it be a business plan, a marketing plan or in this case, a cash flow forecast. If you have a plan that you regularly refer to and update, you won’t be unpleasantly surprised,” Michael says, “A good cash flow forecast helps you figure out what the next 12 months will look like for your business—the cash inflows and outflows that you expect.”
Michael also suggests that entrepreneurs revisit their forecast at the end of every month and continue to monitor it on an ongoing basis. Need help creating a plan? We’ve got you covered. Download our free cash flow canvas.
5. Think carefully when purchasing assets
Michael also considers the proper financing of payables and assets to be a great way to manage a small business’s cash flow.
“There are a few rules when it comes to assets. When purchasing assets, you should put some consideration into whether you should lease, finance or pay cash,” he explains, “Ask yourself: ‘what is the usage of this asset, and is it a long-term solution or will it be used for a short period of time?’”
“If it’s a long-term item that will be used for years to come to generate income, then maybe a discussion with your bank about some financing is in order since it could ease the strain on your available cash.”
If you’re looking at a short-term solution, Michael recommends leasing as the better option.
“You can use the asset for its purpose, then send it back to the leasing company. Remember that cash is king, so keeping cash in the bank should always be a priority,” he says, adding that it is rarely advisable to use cash flow to purchase an asset. “Nor would it be advisable to use your operating loan to do the same. Cash pays the bills, so look at financing large asset purchases to keep money in the bank so you can weather the ups and downs.”
Want more advice to help you with your business? Our Entrepreneur’s Guide to Starting a Business is full of resources and advice for emerging entrepreneurs like you.