Cash is king part 2
How to turn more of your profit into cash
In my last blog I looked at what makes a business cash generative by breaking the income process up into four different segments; spend cash, make a loss, make profit and receive cash.
In this blog I look at helpful tips to use in your business to help speed up the ‘receive cash’ part and make your small business more cash generative. It won’t happen overnight as it takes a combination of factors to create the type of change you want. However, do not believe that just because your industry is typically a poor cash generator that there is no way of turning things around - there almost always is.
Spending cash slower
● Make sure you ask for payment terms from every supplier - this means asking your suppliers what credit terms are available to you and what you would need to do to gain extended credit terms. Obviously take care to pay these before you start paying interest.
● Ensure that your bookkeeping processes allow you to pay suppliers promptly but in line with their terms. Many suppliers will give you up to 60 days interest free credit - take advantage of this.
● Look at your expenses and see if you can pay for certain ones monthly rather than up front (e.g. insurance and licences typically ask for payment up front).
Make a loss later and a profit sooner
● Invoice promptly and look at ways of bringing your invoicing forward, for example by providing a monthly service invoice at the start, not the end, of the month. You can even ask for a deposit and invoice at stages during the work timescale with a final invoice at the end. The sooner a customer has the invoice, the sooner they can pay.
● Make sure your work in progress system is reviewed to ensure you are not holding onto unvoiced work in progress for too long.
● You cannot control what your suppliers do to effect when you ‘make a loss’, but you can choose which suppliers you work with so make sure you pick ones that fit in with your overall cash generation goals, not just profit.
● Can you get your customer to purchase the materials? For example if you are a builder or plumber ask for an upfront payment for the parts and materials needed to do the job or ask them to buy them and you simply fit them.
Receive cash sooner
● Can you use direct debits to control how your customers pay you or move to regular monthly payments, rather than payment on receipt of invoices. This will work with regular customers.
● Use your bookkeeping processes to keep tabs on who owes you money, put a process in place for chasing debt e.g. phone call followed by first letter, followed by letter before action etc…
● Can you offer a discount for early payment by your customers?
● Altering your terms can have a massive effect. Have you thought about putting your invoices to payment after 15 days net or even asking for payment on receipt of invoice?
● If you hold too much stock it will mean that it takes longer to turn those goods into cash. Review your stock control measures to ensure stock is not being held for too long.
● Review your customers and focus on the best ones who pay promptly, think about not working with those customers who always pay late and costing you time and energy chasing the debts.
The overall idea here is that you can make plenty of profit on paper, but until that money hits your bank account, it means very little. By having the right processes in place and developing systems that are efficient and easy to manage, you can avoid the trap of being profit rich and cash poor.