As humans cannot function without blood, cash is often called a business’s ” lifeblood.”
Cash flow is essential for long-term success because it supports operations and investments, fosters growth, and offers stability and flexibility. Effective cash management is vital to every successful business.
Most small business directors have misconceptions that when their business makes a profit, they should have more cash in the bank. Alas, they forget about repayment and investment on the balance sheet. Note that profit and cash are interrelated in business but not the same.
Don’t be surprised if your business is profitable on paper but struggling with cash. You are not alone but need help.
Profit or Loss accounts in business are backwards-looking, while cashflow forecasting is forward-looking. You cannot change the past; however, you can use the lessons for the future.
Note that the lifecycle of the business may affect cash flow forecasting. A new, expanding business will find it challenging to anticipate cash flows with certainty, handle them realistically, and seek help.
At times, cash in the business is not about how much energy you put in or how many sales you get but about the business strategy you implement and review regularly.
See some apparent and overlooked practical strategies to improve cash in your bank account.
1 CASH SAVINGS
A separate savings account and regularly saving some percentage for VAT and all other taxes with other expenses from income received are good discipline. That way, you will be forced to do more business and have more cash savings to buffer any cashflow shortages.
In addition to regular taxes and other savings, your reserves should include a minimum amount to cover at least three months of operating expenses (working capital).
When you have some extra cash, make sure your money works for you by investing in easily accessible investments that can be released when needed.
2 DEBTORS MANAGEMENT
Many businesses take this area lightly, for different reasons, mostly because of no time to chase customers, not to offend customers or lose their customers; however, responsible customers who would like you to be successful will not owe you without explaining the reasons to you nevertheless handle with care and consideration
1 Over dues Invoices
Monitor debtors closely and follow up with courtesy calls and reminders for overdue payments. Create a process for reminders and payment collection.
Time to Invoice
It would be good to issue an invoice immediately after the goods are delivered or services are rendered; the more you postpone it, the less cash you have in your bank. In some cases, the timing can make a big difference.
Credit Terms
Let the customers know your credit terms from the beginning; due on receipt of the invoice is the best. If not possible, the fewer days for your terms, the better. If there are issues or concerns, it will show at the beginning, and as soon as they know your rule, they will follow it; as long as you are fulfilling your side of the obligations, any changes to that will likely be communicated to you.
Early Payment
You must encourage customers to pay early by offering discounts if payment is received within a specific time. It also works well. If you have some outstanding invoices, you can total them and give a discount to receive most of the money early, if not all.
3 EXPENSES AND CREDITORS MANAGEMENT
Regular Expenses Review
It would help if you regularly examined your expenses, especially on standing orders and direct debits, to find areas where you may save without compromising operations. This may include changing suppliers or realising unnecessary costs.
Negotiate with Suppliers
Always try to negotiate payment terms longer than what you give your customers. If possible, renegotiate some contracts or extend the payment conditions to give you more time to hold onto your cash.
Big Purchases
As a principle, don’t rush into big purchases or investments; try to have a few months of operational cash in reserves.
Variable cost
Avoid or reduce any regular expenses, such as salary, if possible. Take on staff on a contract or commission basis until you are comfortable putting them on a permanent contract so that you can manage your costs. Be wise, as it can sometimes be challenging to find good employees.
4 CASH FLOW FORECASTING
Use forecasting technology to monitor your cash flow frequently, identifying and proactively addressing cash flow problems before they become serious despite your operational needs and strategic investments.
It will also help to know what purchase invoices you can include in your coming pay run to maintain an adequate positive cash flow in your bank account.
5 VAT CASH ACCOUNTING
It is not enough for your accountant to give you a quarterly VAT figure and then let you pay. You need to know the type of VAT scheme your accountant uses.
In Cash Accounting VAT, you only pay VAT on the cash you receive from your customers and claim on the expenses you spend, contrary to the standard VAT scheme, which requires you to pay VAT on all invoices you raise. Cash accounting VAT is helpful for small businesses with a turnover of less than £1.6 million.
6 LEVERAGE TECHNOLOGY
Digital Marketing
Employ low-cost digital marketing techniques like email and social media to boost sales and visibility and generate more income.
Monthly management report
Use technology to take advantage of real-time financial information. Compare three months’ management reports, which must be completed and discussed within five days of the month’s end, to justify the necessity of all the expenses in the current month and cut any unnecessary costs early.
Recurring invoices
For regular invoices, set up recurring invoices to create and send invoices without human intervention, send reminders, and possibly collect payments. This will increase your efficiency and likely result in more cash in your bank account.
7 DEBT AND FINANCING OPTIONS
Good credit score
Your company must always maintain a good credit score, as it will help you find cheaper credit and provide you with a wide range of credit options at a reasonable rate. Also, ensure all your filings with the company house are on time. Good credit can give you more cash in your bank, as bad credit is more costly than you think.
Loan / Line of Credit
Yes, most businesses survive and expand with credit, which can be a significant relief. However, credit must be used wisely, especially by small businesses. Review the interest you pay yearly by looking at it on paper instead of relying on the general idea of knowing the rate. See if your company can do without or reduce the credit by performing a cost-benefit analysis with the mindset that all the interest paid may have been cash in your bank account.
Also, note that lines of credit like credit cards and overdrafts are more expensive than loans. So don’t swim in your overdraft and ignorantly justify yourself by saying you are within the limit; it is too costly and reduces the cash in your bank accounts.
Consolidate/ Refinance debt
If you have multiple loans, it would be wise to consolidate them into one loan to help pay a lower amount, get lower interest, or get better terms. However, you must be cautious with sound advice, as most loans have higher interest at the beginning of the terms, hence not switching from a lower interest payment to a higher one.
Paying higher interest debts first is a good idea if possible.
8 PRICING STRATEGY
Review Pricing
You need to review your pricing strategy regularly to ensure that you are running a profitable business. If the market allows, minor price adjustments can increase your cash more than you may expect without increasing sales volume or your customer base. However, you need to know your customers, market and competitors, as the market may not allow any price increase. This strategy may also help to trigger the negotiation of your expenses and purchases.
Value-Based Pricing
We are in the digital age, so it will be a good idea to base your pricing on the value you deliver, not on the old style of cost-plus pricing, especially if you are a professional service provider. It would help if you evaluate your clients; it is not about the number of clients you have but the number of quality clients. Primarily if you can deliver high-quality offerings; if not, increase your game to be in business and have more cash in your bank account.
9 STOCK MANAGEMENT
Old Stocks
It would help if you have a timeline for your stocks that should be sitting in the stock room. Any stocks not sold within the period should be sold, possibly at a discount, to get the cash in before they become obsolete.
Stock Monitoring
Use technology to track the stocks available at all times to avoid overstocking and tie down cash.
Just in Time (JIT)
You can order most of your stocks at the time you need them, though this may not be practical all the time, especially during a busy period or for scarce stocks; the idea is not to hold too much cash in the stock room with no specif period that will be sold.
10 INCREASE SALES
More sales is an obvious answer that always comes to mind when you need more cash in business. Surely, focusing on increasing your sales by reaching new markets or offering new products or services can make much sense in bringing more cash. However, it must be profitable sales with correct pricing. Promotions to attract more customers must be planned and reviewed to ensure they meet and achieve the targets.