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Article | 3-minute read

Shortening your business’ cash cycle

Cash flow forecasting | Cash flow improvement

Shortening your cash cycle will boost your cash reserves, keeping your business going and providing a buffer in times of financial uncertainty.

The longer your business goes without cash, the longer it takes you to pay your creditors, and the riskier your business becomes. With payment methods and preferences changing, and credit cards becoming more highly accepted, it is important to be wary of credit card fraud and make sure your business has clear credit terms in place to reduce the likelihood of customer credit issues.

Below are five intelligent ways of shortening your cash cycle to help you get paid sooner, and ultimately to remain in business.

 

1. Invoice immediately

Why wait until the end of the month to invoice your customers? Sending invoices immediately encourages prompt payment.

Invoices should be prepared and delivered immediately upon delivery of your goods or services to your customers – or as soon as reasonably possible.

If your invoices are sent too late, they could:

  • Make your business appear unconcerned about getting paid
  • Cause your cash flow to grind to a halt

If you’re currently waiting until the end of each month to prepare your invoices, you could be unnecessarily adding up to four weeks to your cashflow cycle.

 

2. Incentivise early payments

You can also encourage prompt payment by offering incentives for customers to pay early.

Some businesses offer a small discount for paying within 10 days of an invoice date.

For example, a discount of around 2% for payment within 10 days could be an effective option that might not leave you too out of pocket.

Your customers are more likely to pay attention to a specific date.

 

3. Always run credit checks

Even the smallest businesses need to have credit policies in place that provide guidelines for determining which customers will be extended credit and on what terms.

Some businesses make the mistake of rushing through the credit check process when presented with a lucrative sale, but it could be the difference between getting paid and not being paid at all.

As a minimum, you should have systems set up where new customers are required to fill out a credit application and consent to a credit check.

 

4. Use shorter credit terms or stick to cash

Shortening your credit terms or removing the credit option altogether might be necessary to consider if your business is: 

  • Facing ongoing customer credit issues
  • Experiencing cash flow problems

You’ll need to balance your decision against the possibility that your prompt-paying customers could be disadvantaged. Offering credit can be a big draw card and removing the option altogether might cause your best customers to start looking elsewhere.

 

5. Be wary of credit card fraud

It’s the merchant that usually bears the risk for credit card fraud, so follow some basic procedures such as:

  • Making sure staff check the signature on each card presented
  • Encouraging customers to enter their PINs as an alternative to signing their cards - it’s unlikely that a person with a stolen card will also know the PIN
  • Asking for another identity document such as a driver’s licence or passport, if in doubt
  • Being wary if the card is presented loosely – or isn’t taken out of a wallet or purse
  • Check signatures and ask for identity documents to help prevent credit card fraud

Remember to exercise common sense to avoid damaging customer relationships. In the case of small transactions or frequent customers, avoid acting in a manner that could jeopardise goodwill.

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The livelihood of any business depends on cash flow – making the ability to forecast accurately a vital skill to navigate financial uncertainty.

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In the current environment, you may have had to take short-term reactive measures to cut your business’s expenses and monitor any overheads closely.

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