You've probably heard it said that cash flow is the lifeblood of any business. Your company can have a great product, exceptional customer service and enough orders to keep you busy. But if you don’t have enough money to survive between the time you deliver a product or service and when you get paid for it, it means you're experiencing cash flow issues. And if those problems are left unaddressed, it can spell disaster for an otherwise healthy business.

Small business owners in Australia are losing sleep over their cash flow. Over half have had to turn down a lucrative project due to lack of immediate funds. And cash flow has been cited as the leading cause of small businesses failing. So what leads to cash flow problems and how do you identify whether you have them?

1) Your debtors don’t pay on time

Let’s face it. No-one likes asking for money. Whether it’s a friend who owes you $50 for a meal out or a customer failing to pay an invoice, it’s no fun. Especially when it can have serious consequences for your business, such as meaning you can't pay your staff.

Perhaps you don’t chase. Or do you wait until it's already overdue? Well, you should ask for it, it's your money! You've worked hard for it and you shouldn’t be the one feeling bad for chasing. It’s your customers who should feel bad that they haven’t paid.

Here are a few tips for making sure your client pays promptly:

  • Invoice immediately. If you have 30 days payment terms on an invoice, make sure those 30 days start right away. Don’t wait until the end of the week, 30 days could easily become 35.
  • List payments terms on your invoices. Be very clear about it. Rather than saying 'payment terms net 30', say ‘payment due after 30 days - July 25th’
  • Have an efficient and organised credit control process in place. Send a reminder email a couple of days before the due date and place a polite phone call on the day the invoice is due. Your debtors will probably thank you for reminding them.

2) You’re paying your creditors too quickly

All businesses are in the same boat. Trying to manage their working capital by balancing cash inflows and outflows. As important as getting your debtors to settle the invoices they owe to you, is making sure you efficiently control the ones you have to pay. Managing your accounts payable is an essential skill for cash flow management.

Pay your suppliers' invoices on the day they are due. Not a day earlier, not a day later. You don’t want to be causing a cash flow problem for someone else, but at the same time, you want to keep funds from leaving your business too quickly.

If you do have cash reserves, consider paying early if you can negotiate a discount. Another reason to avoid paying late is that it can lead to payment penalties.

3) No access to finance

If you're already in a tricky cash flow situation and you’re looking for finance, then it’s probably already too late. You should have a short term financing facility in place before you need it.

Perhaps it’s invoice finance, a business line of credit or an overdraft attached to your transaction account. Don’t wait until it’s too late.

Some types of funding can take weeks or even months before you can access the funds and when every day counts, that could be too long.

Alternatively, perhaps you have too much debt or you took out the wrong kind of loan. Maybe you have multiple loans or you’re repaying some equipment that you no longer use. Servicing old and bad debts can cause big problems for otherwise successful businesses. It’s critical to research all business funding options thoroughly and choose the one that is right for you.

4) You’re discounting to improve sales

Your pricing strategy is essential when it comes to maintaining positive business cash flow. Whilst offering discounts can boost sales, you need to ensure your profit margins don’t take too much of a hit. Even a small discount could mean that you'd need to sell 2 or 3 times as much to make the same amount.

A good pricing strategy means keeping a close eye on what your competitors are doing and regularly reviewing what you’re charging. Stay on top of what they’re offering and be clever about your prices.

Perhaps you could find another way to offer value to your customers, rather than discounting. Package a product up with something inexpensive and charge the same amount. This could help maintain profitability and improve cash flow, whilst giving your customers that feeling that they’ve got a bargain.

5) Inadequate financial records

Is your bookkeeping up to scratch? For efficient cash flow management, you need to know exactly how much you need to sell in the next month or quarter to keep the lights on.

Forecast your cash flow so you know what your cash inflows and outflows are. Make sure you know what your cash flow break-even point is. Can you reduce expenses to bring down this down? In slow months, what levers can you pull to keep going? Plan out different scenarios so you don’t end up with a poor cash flow situation.

If you're not using it already, cloud accounting software can automate a lot of the work for you.

6) Your business isn’t growing

Are you finding that your business is treading water? Perhaps you have enough money to keep your doors open, but are only just surviving month to month? Maybe you don’t have the resources to take more orders. A good cash flow strategy is to be proactive. Think about what strategies you could use to win more business:

  • Upsell - is it possible to offer different types of products to the same customer?
  • Marketing - what channels can you use to get your message out to more potential clients? Consider digital marketing - paid search and social media advertising can be inexpensive and effective if done correctly.
  • Nurture prospects - it's said that an advertising message needs to be seen a certain number of times before it is fully understood. If you have your prospect's email addresses, develop a strategy to educate them on the benefits of your products over a series of emails.
Russ Watts

Digi Marketer, responsible for spreading the Waddle word far and wide. Writes the blogs, manages the ads & comes up with ways of making invoice finance sound exciting.