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We’ve all heard the old adage, “Cash is king.” As a small business owner, you know the value of positive cash flow and how important it is to continue to grow. If you’re looking to increase your working capital and take the next big step in your business, consider these tried-and-true tips.
First up, let’s talk Accounts Receivable – the foundation of healthy cash flow.
Ask for Cash Upfront and Create Payment Terms
Structure your terms in such a way that you receive partial payment for the work immediately, partial payment midway through and the remainder once it’s complete.
A good strategy is 25% upfront, 25% halfway and the remaining 50% upon project completion. Many accounting platforms now accept partial payment for invoices, making the process easier on you.
In some industries, asking for cash upfront isn’t the standard. Be sure to research or ask colleagues what is generally the accepted set of terms. Fitsmallbusiness.com has some great tips on invoice terms you can use
Credit Check New Customers
Knowing is half the battle and understanding the credit score of a new customer could help you prepare special terms for at-risk customers or discounts for exemplary ones.
Equifax has options for both business and personal credit checks in Canada.
Pick Favourites
Segment your customers based on their payment behaviour. Who pays on time and who pays late? Who has 90-day terms and who has 10-day ones? By grouping customers according to their ability and likelihood to pay on time, you can make better decisions about how to handle their business on the next purchase, who requires a discount for better terms, or who is at risk of defaulting altogether.
Reward Early Payment
Reward early payment by discounting invoices for customers who pay within a predetermined time period from the issue date.
Canada Business Network recommends a 2% reduction if a customer pays within 10 days. It even goes as far as suggesting you raise your prices by 2% to begin with in order to offset the discount, should customers consistently choose to pay early. Read the Canada Business guide on early payments here.
Automate
You can reduce or even eliminate the lag between completing a sale and sending an invoice. Use your accounting platform to automate the process of invoicing and collecting payment so documents are sent instantly and payment terms begin without delay.
Many online accounting platforms automate invoicing, ensuring you’ll never miss sending a bill to a repeat customer and can even offer automatic discounts to clients who pay early.
Have a Plan for Collections
There is a risk that some of your customers may pay late. In fact, 48% of invoices sent by small businesses in Canada and the U.S. are paid late. When you have a plan to act on collecting from late customers, you can reduce the delay in recuperating payment significantly.
This could include having an awkward conversation with a customer ASAP, charging interest on late payments, or overhauling your Accounts Receivable process overall.
Now that you’ve nailed down your Accounts Receivable, it’s time to talk exciting and outside-the-box ways to increase your working capital.
Plan for Seasonality
Some businesses naturally have ‘seasons’ – but even if you’re not in a typically seasonal industry like apparel or construction, it could be worth analyzing historical cash flows and look for any patterns in highs and lows year over year. Here is some excellent info on retail seasonality that has applications in other industries to help you get started
Anticipating changes in cash flow allows you to plan for borrowing, rearrange schedules and hire temporary staff, or reduce costs during slow periods for example.
Add Adjacent or Over-the-Top Products and Services
You’re a trusted business owner in your company’s space. Consider the other services you could integrate into your existing offering to increase cash flow from individual customers. Business strategists call this finding your adjacent ideas.
Think about how adjacent ideas could apply to your business: a lawn care service company offers a selection of fertilizers delivered monthly; a healthy grains snack bar producer adds juices to their retailers’ shelves; a temporary staffing agency offers to review resumes for full-time hires.
Consider Longevity with a Subscription Program
Loyal, repeat customers are in a good position to try a subscription program.
A subscription implies a contract to offer continued or repeat service. For some industries this is a natural fit:
- landscaping and lawn care
- health care services
- goods including delivery
- professionals on retainer
- cleaning services
Here’s a great guide on setting up a subscription-based business.
Consider Your Equipment and Space
If you still have some of your ‘vintage’ gear for small-scale production, consider selling it. It’s never been easier through online classified sites.
Another option is freeing up income that’s invested in your everyday workplace. Consider downsizing, relocating, or sharing your workspace to reduce rent expenditures – and probably some clutter, too.
Inventory management factors into this as well – a smaller space might mean reduced stock on hand for products that stay on the shelf longer.
Buy in Bulk
Many suppliers will offer a rate discount when buying items in larger quantity. It can be a no-brainer decision sometimes: compare the dollar-value discount received on bulk purchases with the cost of capital used to purchase those supplies.
If you do have enough facility to store supplies at low cost, it’s worthwhile to ask your supplier for their discount rates. Bulk buying is often a win-win for both buyer and supplier; it doesn’t have to be a difficult question to ask.
One of the barriers to buying in bulk, of course, is not having the capital on-hand to purchase bigger orders. Funding invoices from paying customers allows you to have that future capital available immediately for expenses and purchases. You know who to call for that service.
Buying in bulk could help you expand who you sell to as well – learn more about how to become a retail vendor here.
Raise Your Rates
Is it time to increase your rate or markup? Be sure your rates are inline with industry standards, cover your overhead, and give you a healthy profit margin.
We’ve discussed increasing rates for general contractors and uncovered some helpful topics.
Shopify also has great advice for ensuring your markup and margins are on-point – they apply to all small businesses, not just e-commerce sites.
Find Alternative Sources of Funding
If your needs are more immediate and you’re cash flow positive, you should consider an alternative source of funding – from Angel Investors to asset-based loans, we’ve broken down the Top 5 Alternative Lending Options for Canadians, including invoice factoring like we do here at FundThrough.
It’s easy to set up and integrates with your accounting software – find out more about what FundThrough can do for your cash flow here.
Put FundThrough to work for your business
We help small business owners navigate cash flow hurdles every day. Sign up in just 3 minutes and receive a credit limit approval within a business day.