We’ve written about the importance of managing cash flow for small businesses and even given ideas for what you can do to improve your financial processes. But there is a bottom line when it comes to cash flow – you either have cash, or you don’t.
Of course, there are things you can do today to improve your cash flow. Here, we’ve compiled the top 5 things you can (and should) be doing.
Get a Retainer
If your business invoices for payment, consider asking for a retainer up front. With a retainer, you agree to be on call for a specified number of hours for an agreed-upon monthly fee. Retainers are most often paid up front or on a regular schedule (monthly, quarterly, annually) and are a great source of guaranteed regular income.
You may be thinking that asking for a retainer isn’t really “standard” in your industry, but standards can always be changed. You could suggest that the retainer be considered an upfront payment for upcoming projects or deliverables. This creates a win-win situation; your customers feel like they’re not “wasting” extra money, and you have the luxury of more consistent cash flow.
If you can’t convince clients to pay a retainer up-front, then consider progress billing. Progress billing is a series of invoices, prepared at different stages in the process of a major project, so you get paid for the percentage of work that’s been completed to date. From the client’s perspective, this may seem more “fair” and also ensures cash flow coming into the business.
Progress billing is often a good solution for long-term projects that are based on milestones. Think of it this way: you hire a marketing consulting company to help release a new mobile application. The first bill will be paid when your app reaches 1000 downloads, the next installment at 5,000, etc. Just make sure that if you’re billing based on progress, the terms are clearly defined and agreed upon before you start on the project.
Longer Vendor Terms
When we talk about billing, we’re often thinking of invoices that are typically paid on receipt, or within a certain number of days after receipt. Vendors usually have set terms (10, 30, 45 days after receipt) but may be open to negotiation if it means getting more business. Many businesses will ask for longer terms (without interest) to delay expenses as much as possible.
As a vendor, you can offer discounts for prompt or early payments. If a vendor can guarantee a 2% discount on early payment, your company’s bottom line is improved by 2%. Even if the percentage seems small, everything helps – including the positive impact on your margins.
Keep Your Business Scalable
Scalability is a great way to improve cash flow. Although usually associated with efficient growth, scalability can also refer to efficient downscaling. Be able (and willing) to scale your business up or down as needed. Often, business owners wait out a dry spell, hoping that things will improve, but even waiting a week can have a negative impact on your cash flow.
If you run a small business, you probably have the responsibility of several different jobs. You wear a lot of hats, and there are probably a few that don’t fit so well. When you scale, those hats that don’t fit – the things you don’t do as well – contract, and get tighter. Strategic planning can help you scale long before that happens, so you don’t end up in an uncomfortable position.
Make Sure Your Message is Clear
When sales don’t come in, it’s often a knee-jerk reaction to lower prices or have a sale. Doing so can create a downward spiral for the business – setting a standard that you’ll settle for less. Before dropping prices, ask the following questions of your business:
- Is our competitive advantage clear?
- Do potential customers know why they should do business with us?
- What additional value do we bring to our clients?
If you can’t answer these questions, your marketing or messaging may need a refresher.
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