So far in this series, we’ve talked about securing capital, getting paid and growing sales. All this stuff can feel a bit overwhelming when you think about it too much.
So, the next important step we’re going to talk about is taking a breather.
That’s right. Having room to breathe is extremely important to running a successful business. You can’t go on living on eggshells; you’ve got to get comfortable about the cashflow in your business.
Here’s how you can give yourself peace of mind when it comes to cash.
1. Embrace early payment discounts (and sleep easy)
One way businesses can help ensure rapid payment is to offer an early payment discount. Not every business can do this, though. If the margin on the goods or services you provide is exceedingly slim, you may have no choice but to accept only the full amount.
However, if you’re smart, you’re operating on substantial margin and you can readily absorb a couple of percentage points of lost margin for the sake of getting paid (and sleeping better at night).
Here’s a useful formula for managing early payment discounts:
- Determine the percentage you’d be willing to discount (2% is fairly common)
- Decide how quickly the payment should be received to get the discount (10 days is pretty standard for Net 30 accounting cycles)
- Determine the amount of tax for the goods sold
- Multiply the sum of goods/services (as well as applicable taxes) by a percent (.02 on your calculator for 2%, as an example)
Based on the above model, the discount on an invoice of $250 would be $5. So, the customer would pay $245 if they make their payment within 10 days
2. Open a business overdraft revolving line of credit
Another way you can make sure your cash flows smoothly through your business is to take advantage of business overdrafts. Business overdraft is like having cash on call. The service won’t cover super small expenses; at least that’s not what it’s really supposed to do. Usually, business overdraft has a minimum loan amount associated with it, such as $2,000 to help cover capital requirements.
A business overdraft is an especially good idea for businesses still sorting out their billing cycle and working toward having enough rolling cashflow to weather the unexpected on their own.
3. Manage the cash you do have
Perhaps the most important thing you can do as a business owner is manage the cash you do have. You can run yourself ragged pursuing every possible funding option, but if you’re not exercising your management savvy at every level, you’re doing yourself no favours in the long run.
Keeping a close eye on profit and loss, tracking key expenditures, like supplies and payroll, and returning as often as possible to your basic business know-how will help improve your cashflow.
There’s no greater sigh of relief for a cash-poor entrepreneur than the satisfaction of knowing that you have made your business better. No matter how much capital you accumulate, regardless of where it comes from, if you don’t keep an eye on it, you won’t know where it’s going.
Be smart: even when cash isn’t lean, it’s not a bad idea to pretend that it is in short supply.
Next… Make it easy to get paid!
For the last instalment in this seven part series, we’ve saved this painfully obvious but often mismanaged strategy for improving cashflow: Make it easy for others to pay you!
Click here to register for the full series.
This article is sponsored by Australia and New Zealand Banking Group Limited ABN 11 005 357 522 (ANZ). The views and recommendations that are made in this document are those of the author and not ANZ. To the extent permitted by law, ANZ disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to this material.
[notice]Success starts here! If you’re thinking of starting a small business, or have recently launched one, you want to do everything you can to ensure its success. Visit the $2 Billion Lending Pledge to find your local ANZ Small Business Specialist and get an indication of how much you could borrow. Click here.[/notice]