Creating A Cash Reserve

If you’re failing to meet your cash commitments each month and eating away into your capital reserves, then it’s time to make some serious decisions in your business.

A business can survive for a short time without low sales or profits, but not without a positive cash balance. It’s cash which pays the bills and allows trading to continue and if you are growing and extending credit to more customers, the need for cash can be even greater.

There are a number of ways to reduce the chance of running out of cash:

Slash and burn

Reduce costs immediately. There are probably a number of expenses in your business that you could do without and now is a perfect time to see what you can cut. There could be:

• Subscriptions to software you don’t need
• Fixed service plans you could switch to a lower rate if you don’t need all the functionality
• Reduce any excess inventory or the amount you hold in reserve
• Curt any advertising costs if you’re unsure they relate directly to sales
• Anything you could do internally (like cleaning) if you really needed to

Go through your last few months of invoices and credit card statements (yours and your employees) to see what could be cut.

Invoice immediately

Make sure all your work is invoiced for as soon as possible and with larger customers you should try to get into the customer’s payment cycle or apply to be an approved supplier as soon as possible.

If you are asked to do more than the original quote, then it is reasonable to negotiate additional payments. This makes it important to specify in the initial sales contract exactly what you will deliver.

If you haven’t already, sign up for accounting software to make it easier to send invoice reminders.

Raise cash quickly

If you need to improve your cash flow temporarily, adjust your sales and marketing plans to suit:

• Bring forward sales by offering customers incentives to purchase in advance
• Offer early-payment incentives such as discounts
• Focus marketing on short-term lead generation rather than longer term objectives like brand recognition.

Be aware that short-term incentives should be just that: short term. Offering discounts and incentives to ease your cash flow is fine but know it erodes your profit.

Request progress payments

When negotiating new contracts with customers be aware of setting payment terms that help your cash flow, such as deposits or progress payments.

• Negotiate stage payments for contracts that take a long time to complete
• Include a regular timetable for the customer to pay invoices as part of any agreement
• Agree on clear milestones for the work to be completed to minimize the chance of the customer disputing any invoices.

Manage inventory carefully

If you hold inventory then tighter controls can release substantial sums of money:

• Aim to hold just enough to service your customers on an on-going basis. Identify seasonal peaks and troughs
• Set a target stock-turn then monitor your performance
• If possible make suppliers your warehouse and let them bear most of the inventory holding costs by buying just-in-time
• Sell off any slow moving, old or obsolete inventory to raise extra cash.

There are great software options to help manage your inventory.

Credit control

An efficient credit control system speeds up your cash collection and reduces bad debt. Some suggestions:

• Credit check all customers before you extend credit terms
• Control how much credit you provide and to which customers. Consider using credit scoring systems and setting appropriate credit limits for all customers
• Avoid giving any customer more credit than you could afford to lose if the sale turned into a bad debt
• Send out invoices immediately after you have supplied the goods or service. Confirm that all the invoice details were correct and that there will be no problem paying it by the due date
• Monitor late payments and chase them up methodically, largest debtors first
• If you intend to charge interest on late payments this must be stated in your terms of trade.

Using a debt collection agency or a specialist lawyer can be an effective method of dealing with non-payers. There are also software solutions that integrate with your accounting software.

New funding

If you do need extra funding to get you through a rough patch then take full advantage of the different types of finance available:

• Speak to us about the various types of finance available to your business
• The SBA have a range of disaster loans available
• Consider asset finance instead of using up your cash reserves to purchase computers, vehicles, plant and machinery.

Remember a strong capital base is vital when in business. You may need to add in additional cash of your own if the business is still sound and the immediate cash problem is temporary.

Note that the resources listed here are meant solely as overviews and helpful information. Please consult experts regarding your specific security needs for your business.