If you have a small business, cash is king, and knowing how to free up cash is important from the very start.
1. Review your Terms of Trade
Decide early on in your business what your Terms of Trade will be:
- Will you have a 7-days, 14-days or 30-days limit to pay for goods or services? Make sure this is clearly indicated on your invoices.
- Have you clearly stated, “7 days from receipt of product” or “7 days from receipt of invoice”? This can make quite a difference in terms of getting paid on time.
- Is Cash on Delivery accepted or not? Make a clear decision.
- Review your Terms of Trade annually, and make sure they are in plain and simple language, not legalese. There is no point having it there if the average person doesn’t understand what it means.
2. Regularly check debtors with good control systems
Do you have regular late payers or payment dodgers? You need to have a good debtor control system in place:
- Use an automated cloud-based invoicing and receipting program that sends out reminders to a timeframe set by you.
- Have reminder stickers for posted account invoices.
- You or a delegate (a bookkeeper or virtual assistant) can either call or email the client with a gentle reminder and options — like paying a percentage of the account now and the balance later — to allow them to manage their payments more easily.
- Consider invoicing more frequently by adjusting your Terms of Trade
3. Budget and forecast regularly
To effectively work out a budget and forecast for your business, you need to combine estimates, actuals and historical figures to get a good overview of where your business is heading. Budgets and forecasts should reflect your business plan and be an extension of this:
- Simply start by creating a list with all your expenses last year.
- Write down any projects, events or promotions that you’ll be doing this year, as well as the cash from sales that you expect to generate.
- Take out any expenses from last year that won’t be current this year: for example computer equipment or office setup. Leave in things such as wages, insurance and running costs.
- Consider how much projects will realistically cost, and stick to a figure. You also need to estimate the revenue that projects will generate, such as through hosting and website creation.
- Factor in your regular retainer clients already on the books, too.
- Don’t forget about your tax requirements as well.
By creating this simple list, you can work out how to reduce expenditure as well as improve your net business position.
4. Make it easy to get paid
Consider having several methods of payment for your clients. If you are a service provider, you may want to have different options from a product selling business. Some methods to consider are:
- Direct debit systems
- Direct credit into your bank account
- Eftpos and credit card payments
- Online payment gateways or e-commerce shopping carts
- Mobile payments
5. Offer incentives for upfront payments or charge interest on late payments
One way to incentivise a sale for customers or clients is to offer discounts, particularly for immediate payment options:
- Offer a discount of 5% or a free product upon purchase. If you’re a private teacher who offers tutoring as a service, consider giving an hour free if a months’ worth of tuition is booked.
- Similarly, penalise customers who don’t pay on time by adding interest to late payments. This often makes people think twice about keeping that bill ‘til the next month.
6. Review opportunities
So you’ve got a customer to buy one of your products or services. This could mean they are interested in what you’ve got to offer, so why not offer them more — either a service or an item to complement the one they have just purchased?
Cross-selling items or services to the same customer makes them a repeat customer. For example, as a web designer this is a fairly easy thing to do, as clients will need:
- Creation or implementation of website content
- Web hosting
- Anti-virus protection
- Maintenance or help desk service
7. Consider financing equipment instead of buying it
Instead of purchasing outright that expensive computer or printer, consider financing the equipment to free up your cash when starting your business. Just be sure not to overcapitalise on what you can realistically afford to repay. The latest and greatest might not really be what you need when first starting out.
Do a quarterly review of what other plans you can put into place to increase your profit margins.
Remember that the above tactics are some easy ways to work ‘on’ your business and not only ‘in’ it. If you’re unsure how to action any of the above ideas or others, seek professional advice from OBT’s friendly team in Gatton on 5462 2277.