Poor cash flow is a big reason why one in every four businesses don’t make it past the first year. But the good news is, there’s something you can do about that. Here are some tips to get you moving in the right direction:
Raise your prices
When you started your business your products and services may have been at a low price as a way to start attracting customers, or because you didn’t realise all the costs that would come up in your business. At this point you may have plenty of work coming in, but it may not be profitable. You might end up having to work 60 hours a week to get the work done. Or, you might have expenses you hadn’t planned for, like the cost of payroll taxes for employees, or new equipment to run your business.
So what you need to do is increase your prices. Yes, this can be tricky, especially for small business owners. Often we are more worried than our customers about price. We might lose the odd customer, but if your margin is 50%, a 10% increase in prices means you can lose 17% of your customers and be no worse off!
Work on retainer
With many businesses, one problem is that income can vary drastically from month to month. When you wear all the business hats, it can be difficult to do the work as well as focus on marketing. If you don’t market correctly, there are going to be times that no business comes in, resulting in no money coming in.
One way to even out your cash flow is to seek clients who are paying you a guaranteed amount of money each month, if you set aside a specific amount of hours to do work for them. Lawyers and accountants use arrangements similar to this. Public relations, computer consulting and other businesses where clients could need repeat attention are good candidates also.
Get some or all of your money upfront
If you’re receiving a long-term project to work on, negotiate to plan getting at least a third of the money upfront. Then if possible, spread the remaining payments so you can cover all your ongoing expenses for the project. If you think it could be difficult to collect if they didn’t pay or they never came to pick up the work they ordered, insist on payment in advance so you don’t have a collection problem.
Review your overheads
If your overhead expenses are high, you’ll be quickly eroding the volume of cash in your business. These can include vehicle costs, office equipment, staff and so on. Review your overheads and consider what is necessary. Do you really need more than one assistant? Is that pricey advertising campaign really working? See if there’s anything in your business that can be cut down.
Understandably, many new business owners put their bookkeeping to one side because they’re too busy with the great workload of setting up a business. But without bookkeeping, how do you know where your money in your business is coming from and going to?
Sage and Kashflow.com are two business accounting software where you can easily keep your finance records. Include every expenditure and all revenues received to generate profit and loss statements. This information is valuable, and you need it in order to know where your business stands at all times.