There are a number of reasons why your company may be struggling with cash flow issues, and many of them have little connection with how much business you are doing and how successfully you are doing it.
Sometimes it is a simple matter of having your payables due before your receivables. If you have to pay a debt before you can collect what is owed you from a sale, there’s trouble ahead.
When the cycle of cash flow issues intensifies, it can end up with you not being able to pay your bills on time or meet your payroll obligations, and that in turn impacts your credit rating and your labor force.
One of the hardest thing to do in dealing with cash flow issues is to let go of some of the beliefs you have about how a business should be run-long term and instead focus on fixing the short-term problem. It is natural that you would hope that others would bear with you while you sorted things out, but very few people will stick with you because it ends up impacting their own cash flow, and they just can’t let that happen.
So here are some of the things that you can do to fix problems with your cash flow situation and ensure that you can continue to grow your business.
Reverse your position and accept it is okay to rent
One of the oldest business adages advises you to purchase your own equipment and space so that you will not be beholden to others are dependent on them if they suddenly raise their prices.
But the reality is that sometimes it is best to forget what your parents taught you and instead accept that leasing is best under certain circumstances.
While you may end up paying more for leasing in the long term, in the beginning, it can keep you solvent. Instead of having to pay out huge amounts of money at the start or accept the burden of heavy debt, you are better off getting started leasing everything from your equipment to your supplies to your facilities.
That way, you can pay smaller amounts at a time and keep everything rolling, and still maintain the health of your current cash flow.
There is also a tax advantage to it.
In your small business in Canada, for example, you can deduct the leasing costs on such equipment as computers, fax machines, printers and even cellphones. You will need to fill out Revenue Canada’s form T2125, also known as the statement of business or professional activities. Even if you use some of the leased equipment for personal use, you can still deduct the remainder.
By opting to lease instead of buy, you can deduct the total lease cost, meaning what you paid to use the item during the tax year. If you purchased the equipment, you can only deduct a portion of the cost every year. The former is kinder to your tax flow.
Send your invoices out immediately with each completed job
Instead of waiting until month’s end, end every job with an invoice at the same time that you send it to the client.
Work on the theory that the faster you get it to the client, the faster it will get into their system for payment. What is the point of actually just waiting until month’s end? The latter won’t help your cash flow. If collecting payment is sometimes challenging from certain clients try offering them a cash discount for early payment.
When it does come time to pay your own bills, pay electronically so your money stays with you right up to the morning of the day the bill is due. If you add to that practice by paying your bills with a business credit card that offers a grace period for up to 21 days, that will also contribute significantly to your cash flow.
Do credit checks on customers and halt jobs when payment is late
The more you continue to work for a client who isn’t paying you, the more you are responsible for hurting your own cash flow.
If you have sent one invoice and it wasn’t paid, followed by a second that isn’t paid, it is definitely time to stop the work no matter how tight the deadline is.
If you continue, you will get into the project so deep that you can’t afford to walk away, and if they don’t pay, you can bankrupt yourself and totally stifle your cash flow.
At that point, you have only yourself to blame, no matter how much you want to believe in the goodwill of the client.
If you are not being paid either with cash, an e-transfer, or a deposit to PayPal, do a credit check on the customer. A check that bounces is as useless as none at all. If their credit is bad, chances are they won’t pay and do you really need that kind of problem, no matter how badly you want the work?
It is okay in situations like that to say that you need half to three-quarters or even all of the payment up front. Make that your negotiating point.
You can also offer discounts for paying the full balance of an amount owing as an incentive to encourage people to pay promptly.
Increase your prices, decrease your expenses
If your cash flow is depleted, it is also possible that your prices are not high enough to cover your overhead. It may be time to increase your prices, even though that is a risky strategy if you are in a highly competitive business.
One way to test the waters is to grandfather in your current clients at your existing price structure for now, but to introduce new rates for new clients just joining you. If they balk, you will just have lost one client, not your entire base, and you can make other revisions instead.
Just remember that it is a good strategy to experiment with your pricing periodically and to raise it when necessary to reflect your rising costs.
One of the best pieces of advice I have ever received about pricing was, “if you are getting no pushback on your pricing then you are pricing too low.”
From the same strategic base, simultaneously examine ways that you can lower your costs. Are you getting the best possible deal from your suppliers? Be creative as you negotiate a better deal.
For example, if you offered earlier payments, would that help their cash flow enough that they lowered your overall investment? Are their competitive suppliers willing to negotiate a better deal to get your business?
Could you link up with a couple of smaller companies in the same industry and form a buying group to guarantee delivery of larger qualities of supplies for less investment?
Can you cut corners and spend less on any aspect of your business without undermining your quality and satisfaction level?
All of these things are worth exploring.
Understanding the cash flow bottom line
The bottom line is that no matter how innovative you are, and how much you sell, if you don’t collect the money your cash flow will be insufficient for you to survive.
Every client, whether you like them or dislike them, has a perfectly good reason for not paying you on time.
At the end of the day, none of them are good enough to risk having your business go under because you haven’t enough cash in the kitty to keep your own workers, suppliers and expenses paid.
Always remember – “Revenue is Vanity, Profit is Sanity, but Cash Flow is Reality.”
Thank you for reading this post. Until next time take good care.
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