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. The cash flow crunch is a common problem for businesses. 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 shift in the fundamental way to operate the business.

2. Enter and send timely invoices

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, check, online payments, or through e-wallets and mobile payments. Allow clients to choose their mode of payment so that the payment is not delayed.

4. Change the frequency of invoicing

If you are working with your clients on a long-term basis and issue invoices once a month, increasing the frequency of invoicing can help with the small but quicker influx of cash.  You can switch to sending invoices weekly 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 daily activities resulting in missed 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 pay discounts is likely to entice your customers to make payments before due dates. It creates a win-win situation. While you get your payments before the due date, they benefit by getting a discount.

Harden the terms to include a penalty for late payments

Imposing a late fee for overdue payments can work in your favor as a) the client would want to avoid additional charges; b) you earn income when payments are late.

6. Implement milestone payments

Alter your terms and conditions to incorporate milestone payments - instead of all payments being due at job completion. This way your cash reserves can be replenished from time to time when pre-defined progress points are reached on the job. You could also consider requiring a down payment for the job to begin, an advance(deposit). It is not uncommon in business to request a deposit. If your clients can afford it, they may be open to this concept.

7. Negotiate terms with your supplier

Seek discounts for paying early from your vendors and suppliers. Pay on 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, let your vendor know and request relaxed 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 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 end 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. Invest reserved funds or checking account money in a mutual fund account instead, until it's needed elsewhere.

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.