Tips for Consistent Cash-flow for Single-Person Business
Cash flow is an important aspect of any business. For most small businesses, it is the only source of working capital. But the cash flow crunch is a common problem. When businesses run out of cash, they hit a major roadblock and are often forced to close down. It is, therefore, imperative that smart and timely measures are implemented to ensure a steady stream of cash for your business. This becomes even more important for a one-person business as it is easy for the business owner to get engrossed with multiple activities and not be able to devote attention to this aspect.
1. Shift to a profit-first approach
Most businesses work on the principle of ‘Revenue – Expense = Profit’. However, this approach requires you to adopt ‘Revenue – Profit = Expenses’. This means for each sale made, set aside a predetermined percentage of the amount as profit. Work with the rest of the amount to deal with the expenses. E.g., If you are a baker and you get an order, you would tuck aside say 40% of your order value as your profit into a separate account and work with the remainder 60% to meet all the expenses required for your deliverables. This is an effective tactic but implementing it requires a paradigm change in the fundamental way to operate the business.
2. Raise and send invoices timely
Generate the invoice and send it to your customers immediately after they have purchased your goods or services. Remember, the clock starts ticking for the client only after they have received the invoice.
3. Allow all payment options
Different clients have different preferred modes of payment – cash, cheque, online payments, or through e-wallets and mobile payments. Allow them to choose their mode of payment so that the matter is not dilly-dallied.
4. Change the frequency of invoicing
If you are working with your clients on a long-term basis and raise invoices from time to time, increasing the frequency of invoicing can help with the small but quicker influx of cash. Eg. You can switch to sending invoices fortnightly instead of monthly.
5. Motivate your customers to pay sooner
► Follow-up regularly
It is not uncommon for your customers to be tied up in their regular activities resulting in slippage of payments. A gentle, friendly, and timely reminder can often do the trick for you in such cases. In other cases where the collection becomes tough, you might have to resort to stricter follow-up involving leadership as well.
► Offer discounts for early payments
Offering early bird discounts is likely to entice your customers to may payments before time. It creates a win-win. While you get your reservation in the cash kitty before time, they benefit by getting a discount.
► Harden the terms to include the penalty for delayed payments
Imposing a late fee for overdue payments can work in your favor as a) the client would want to avoid it b) you would get paid before the other contractors.
6. Implement milestone payments
Alter your terms and conditions to incorporate milestone payment – instead of all payments at the end of work done. This way your cash reserves can be replenished from time to time. You could also consider working on a part-advance (deposit) payment too. It is not an uncommon norm in business. If your clients are cash-rich they may be open to this concept.
7. Negotiate terms with your supplier
Seek discounts for paying before time. Pay in time, if not early, to avoid falling prey to the late payment penalty. This also helps you build trust. If you are facing temporary issues, you could request your vendor to relax the terms as a one-off case.
8. Increase prices
Raising the price of your product or service is one way to improve margins and thereby the cash inflow. But before you resort to increasing the prices, weigh factors like value proposition, competition prices, prices of raw materials, inflation, etc. Price your products appropriately so that you are not undervalued. Position the price hike carefully so that you don't land up alienating your customer base.
9. Evaluate your investment options
When you work so hard for your business, make sure your money works hard too. Evaluate your investment alternatives from time to time and choose the option that gets you the best returns. E.g. Invest the idle money in the current account in mutual funds instead for a couple of days.
Cash Is King!
Cash is the lifeblood of a business and is often the key to survival. Even if your business is not facing a cash crunch, working on tips shared here will only improve the health of your cash pool allowing you better control over your business activities.