Cash flow is critical to any business despite the size or type of business. Cash flow can be compared to a river. A river will always flow into a dam or the sea and for the river to remain flowing there needs to be a constant inflow of water. At some point there might be a cascade where the water will be tumbling down over rocks and building up to that cascade the river needs even more water flowing in. When there is a strong inflow of water the cascade turns into a beautiful picture. Similarly businesses need a constant inflow of cash to support their cash outflows in the form of expenses, paying suppliers and repaying debt. When a business has a solid inflow of cash and manage the outflow of cash, the business can ultimately grow and thrive.
In a recent study conducted by SasFin and sme.africa, businesses indicated that cash flow (or rather a lack thereof) contributes to 61% of their biggest financial stress and concerns during the current pandemic. Implementing an effective cash flow management strategy is becoming more critical now than ever before. Here are a few tips to help businesses improve their cash flow:
Change your invoicing to improve cash flow
- Invoice more regularly and not only on a monthly or weekly basis.
- Implement an automated invoicing process / system that sends out invoices as soon as possible.
- Make it easy for clients / customers to pay by offering various payment options i.e. cash, credit card and electronic fund transfer.
- Include a payment link / button on the invoice for immediate payment.
Use multiple accounts to manage cash flow
Making use of multiple accounts can fundamentally assist to effectively monitor the cash flow throughout the process and immediately identify any shortages in cash or cash flow inefficiencies. Multiple accounts can refer to two types of accounts:
- Control / suspense accounts which can be used as a book / accounting entry only to monitor the cash flow process. In this instance cash doesn’t necessarily move between different bank accounts. This is only a cash monitoring function.
- Use separate bank accounts to manage cash flow more effectively. For example transfer the VAT component of any funds received to a separate bank account to have money available when the VAT payment is due
Recover debtors to improve cash flow
- Offer a discount if clients / customers pay earlier.
- Set-up payment terms and communicate accordingly with clients and customers. Don’t be afraid to charge interest and penalties for late payments, but ensure the terms were communicated beforehand.
- Where a big client only pay at month-end, negotiate with the client to pay a few days earlier.
Extend payments to improve cash flow
- Another crucial aspect of effective cash management is to extend / defer cash outflows without incurring penalties or interest. Any business will benefit from retaining cash within the business for a prolonged period.
- For bigger payments, consider to make payments in two instalments to spread big outflows.
For more strategies to improve business cash flow, download the ‘’FREE Guide to Improve Business Cash Flow’ – click here
For a special post-lockdown cash flow consulting package to support SMME’s – click here