The effective management of payments, both incoming and outgoing, is one of the defining factors in the success of your small business. This is referred to as ‘cash-flow’, and to keep your business running, it’s essential it remains at a healthy level.
If you think of your cash-flow as a water tank, sometimes it’s nice and full, sometimes it’s a little more drained, but it must never be empty. Without cash in the business, you will not be able to pay for stock, raw materials, rent, employees and all the other things you need to operate effectively.
The key to maintaining a healthy level of cash-flow is to carefully manage your payments to suppliers and from customers. Here’s what you need to think about:
Having a clear view of your incoming payments is essential for small business decisions makers. You need to know:
– When incoming payments are due
– When incoming payments are made
– When your account balance hits a lower limit
Constantly checking to see whether payments have been made is one of the biggest pain points for small businesses. By setting up real time alerts, you can get a snapshot of your cash-flow on the go, without spending hours every month checking your account.
- Setting the right payment terms
Setting the payment terms and conditions for your small business might not seem like a priority, but it’s crucial to maintaining a healthy level of cash-flow. Keeping your payment terms short, sending out invoices on time and communicating with your customers is all part of the process.
There’s no reason why you should wait 30 days for payment. If you’re serious about your work and deliver your products and services within your clients’ deadlines, there’s nothing wrong with setting a 7 or 14 day payment deadline.
- Encouraging customers to pay on time
Unfortunately, some customers will take longer to pay than others. Small businesses are forced to wait an average of 23 more days for payments than larger companies. But there are ways around these bully-boy tactics.
Every business is entitled to charge interest on late payments. There are also finance options such as invoice financing, which gives you an upfront payment of up to 85 percent of the value of an invoice when it is issued.
- Payment terms with suppliers
Negotiating the right deal with your suppliers doesn’t necessarily mean getting exactly what you want at the best possible price. The best deals are those where both sides are comfortable and happy with the agreement in place. This helps to ensure quality products or services delivered on time for you, and a fair price that’s paid within a reasonable timeframe for the supplier.
You should discuss and agree payment terms with your supplier and settle on a timeframe. You should then make a regular time to pay your suppliers. Weekly works well as it coincides with 14, 21 and 30 day settlement periods. Do not pay your suppliers late, and if you are struggling to make a payment, make sure you contact them immediately to let them know.
- Building relationships and encouraging flexibility
It pays to spend time building good relationships with your key suppliers. Getting to know your suppliers by meeting face-to-face and talking to the people who’ll manage your account can increase the level of flexibility you’ll be allowed.
You should help your suppliers by placing orders in good time, being clear about deadlines and looking for opportunities you can pass their way. Your reward could be an improvement in the quality of the service you receive and increased payment flexibility.
- Setting credit limits
It’s equally important to agree the right credit limits. This will help you control the amount of money going out of the business at any one time. As you grow, you can negotiate with the supplier to extend your credit limit upwards.
To find out how KPMG Small Business Accounting could help free up your time so you can concentrate on business success, request a callback for a quote today.
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