Why does my business not make money?
If only I had a dollar for every time a client asks me – “If my business is profitable then where is the money?”
Most small businesses experience cash flow problems and may at times require urgently working capital. Many business owners immediately think of the bank or loans when money is short. There are other resources you can tap into before you ask for that expensive overdraft or overdraft extension. The money you need might already be there—locked up in inventory, assets or in outstanding debtors.
You can often free up funds from within your business By reviewing your business financials and systems, you may find you can easily free up funds. that may be sufficient for your immediate needs.
Here are some tips on how to best achieve this:
Even if the funds you free up from within your business are not sufficient, there is another payoff: the effort you make in searching for them helps to ensure that you are running your business in an efficient manner.
To free up funds from within your business, look closely at:
Your assets include debtors, stock, pre-paid expenses, vehicles, plant and equipment, fittings and property. Each of these is a possible source of funds.
Are you on top of these? Do your customers delay paying your bills? If so, they are having free use of your money. This is a common occurrence in small businesses where the business owners are so busy working in their business that they don’t pay enough attention to basic business procedures. Many customers will take advantage of this ‘free money’. But your business is not to serve as a free bank.
Here’s how you fix the problem:
- Get invoices out promptly. Whatever else you do, become efficient at getting invoices out early. This is your future cash flow—the lifeblood of your business! You want to receive it as soon as possible. Start this new system NOW. Depending on your business, you can often cut out statements simply by printing at the bottom of the invoice: ‘Please pay on this invoice as no statement will be sent.’
- Send the invoice with the goods or immediately the service is completed. Date the invoice from no later than the day it is sent rather than following the standard ‘last day of the month’ date for invoices. The earlier the invoice date, the better your chances of getting paid earlier.
- Change the terms for some of your customers, or for new customers. For example, can you reduce ask for immediate settlement or set reduced payment terms such as 7 days or 14 days from date of invoice?
- Follow up promptly when invoices aren’t paid by due date. This is critical. Be polite but firm. If you haven’t the time to do this yourself, then appoint someone to do it for you.
Monitor your debtor collection days and set an improvement target each quarter. For example, can you find out the benchmark standard for your industry? If the average in your industry is 30 days, but you are taking an average of 45 days to collect outstanding debts, then there’s clearly room for improvement. If your customers or clients have been taking advantage of you because of your previous laxity in invoicing, then you may need to re-educate them. Do this politely so you don’t offend customers in the process.
Provide easy payment options and your customers may be tempted to pay your invoices much earlier. It is staggering how many people prefer to pay their bills by credit card option so, they benefit from point schemes. Why not look into cost effective ways to provide this to your customers? There
Consider factoring. This simply means selling your outstanding invoices to a finance company. So instead of having to wait 30 days or more until an invoice is paid, you receive most of your money upfront from the finance company that then in turn collects the money from your customer. The finance company will of course charge you a commission for this service. Be aware, though, that there are pros and cons to factoring. For example, so not antagonise your customers with a heavy-handed approach. Ask for an outline of their collection methods.
Consider offering a discount for prompt payment. If you’re going to pay a fee for factoring, why not try offering a discount to your customers instead? Discounts are not a good option for low-margin businesses, but can be an option for high-margin operations. You have to work out whether the use of money gained earlier is worth the discount you’re offering. NEVER give the discount if the person has missed the due date for the discount offer. Yes, some will try though.
Do you have excessive capital tied up in stock? This can occur in two ways:
- carrying high levels of items that you could obtain from suppliers at short notice
- having too many slow-moving items (and too few fast-moving items).
A quick sale?
Review regularly your stock levels, your stock turnover rates and your purchasing policies. Can you free up money by reducing stock? What about moving out of the slower-moving lines or having a quick sale of dust-collecting stock? It might pay you to reduce some items quite heavily to get some money in quickly.
Can you approach suppliers to take back any excessive stock you may have ordered? They might be prepared to help you out of a temporary tight corner as a goodwill gesture once explained.
If you need additional funds to purchase more stock, make sure that you’re replacing slow-moving stock with the faster selling lines.
This is another area you could look at. These pre-paid expenses often relate to services. For example, you might pay your insurance bill for the year all in one hit, but you could arrange to pay small monthly amounts. There might be an additional cost for doing this, but if you weigh the extra cost against the advantages of 12 small payments which your cash flow can comfortably handle it may be worthwhile. You could do this other suppliers to ease your cash flow.
Assets can drain cash out of a business. Do you really put all your assets to full use? You might be able to:
- Sell off little-used assets and hire suitable replacements when you require them.
- Lease or rent assets and equipment that depreciate rapidly such as computers and or vehicles
Don’t forget your customers can be a source of business funds. Apart from debt collection improvements already discussed, try these tactics:
Here’s a ‘thinking outside the square’ tactic. Ask some of your credit customers (start with the ones you know best) if they would be willing to use their bank credit cards for purchases from you, instead of using the account facility they have with you. For example, if they purchase say $2,500 worth of goods or services from you, they would pay for this by means of a business credit card. They still get 30 to 55 days credit before having to pay the credit card company, but you get your cash as soon as you sent in the voucher to the bank. You have to pay the (around) 5% commission, but otherwise it’s almost as good as a cash transaction.
If you’re starting a new business, consider establishing it on a cash only basis to keep the funds inside your business rather than locked up in Accounts Receivable.
Ask for progress payments
If you supply goods over a period of time, or if you’re a service business, ask if you can invoice for progress payments. This is quite a common method of ensuring you get some cash flow during a project instead of waiting until the end of a project or delivery period to invoice—and then still waiting at least another 30 days for payment.
There’s another benefit here too. If the customer turns out to be dodgy, you’ll discover this quite early on instead of at the end and you can cut your losses before they mount up and perhaps drag your business down. This tactic is therefore very suitable for tradespeople subcontracting to a developer.
Finally, consider your suppliers as a possible source of funds. Ask for extended payment terms to give you the opportunity to sell the goods first before you have to pay. If the supplier won’t budge, try this tactic: split the order in two and offer to pay normal credit terms (30 days) on the one half of the order and 90 days on the other half. Your suppliers will be more likely to agree to this kind of arrangement if you’ve paid them promptly in the past. After all, they have a vested interest in helping you succeed.
- Quantity breaks – incentivise customers to order more through quantity discounts.
- Re-order levels – Setup minimum stock levels to avoid stock outages on important lines.
- Default reorder quantity – Setup re-order quantities so the most economic order quantity is placed.
- Receive Stock – Receive items into stock so you can sell them before receiving the final bill
Take advantage of discounts
Pay accounts that give discounts on time. This is an easy one. If any suppliers offer a discount for early payment, then take it. There is no harm in asking for a discount either, if you don’t ask you won’t get!
These suggestions may not all be suitable for all businesses, however if one or more of the above tips work then you and your business will be in a better place.
Get in touch
Feel free to contact us about ways to find money in your business.