- Communicate Payment Terms Quickly & Clearly
- Offer Discounts & Impose Late Fees
- Analyze Cash Flow Patterns
- Lease Your Equipment
Exactly What is Operating Cash Flow?
Operating Cash Flow is cash generated by your business operations. If you’re generating positive cash flow that’s sufficient enough, you can grow your company. Now “sufficient” cash flow should be determined by your company's internal Key Performance Indicators (or KPIs) to define. If your operating cash flow is falling short of your benchmark, there are various steps you can take to improve it.
Steps to Improve Your Operating Cash Flow
Communicate Payment Terms Quickly & Clearly
Fast and proper communication has a direct effect on your operating cash flow. After negotiating and landing a sale, the job for your company has only begun. Accounts receivables can build if customers take their time to pay you.
Ensure to communicate your payment terms upfront with your clients. Some negotiation may be involved, but try to make it as early as you can. For larger amounts due, an initial deposit based on the total cost of the job can help your business have immediate capital. Sending out invoices immediately after creating one for a customer is crucial for your records. Ensure the terms and due date are easily spotted on the invoice, and if you’re emailing the customer, it helps to repeat the amounts and due date in the email.
Let’s suppose a customer falls behind or fails to complete their payment. In this situation, don’t hesitate to tactfully remind them that you haven’t received anything for the work you’ve provided. To help you keep track, there are plenty of invoice management software options out there on the market which automate the process for you.
In plenty of circumstances, late and forgotten payments can be solved by fostering communication skills which will, in turn, improve your operating cash flow.
Offer Discounts & Impose Late Fees
You’ve probably experienced discounts and late fees from the customer's perspective before. Think about how much you wanted to avoid a late fee on your credit card provider, or how great it felt to receive a 2% discount for paying a week early?
Both methods are excellent ways to encourage your customers to pay you and keep your operating cash flow healthy. For either method, set measurable goals to see if customers are paying you earlier and/or on time.
For example, you can set a 3% discount percentage on the total value of an invoice if it’s paid within seven days. You can define success for the discount program if at least 10% of clients pay early, for instance. Conversely, you can charge a 5% APR late fee on the invoice’s total value. If you’re issuing late fees, make sure you inform and warn the client in a neutral manner, stick to the facts, and refer to your initial client contract.
As a reminder when setting goals for late fees and discounts, it’s wise to double-check industry standards to get an idea of where you should start.
Analyze Cash Flow Patterns
Chances are, there’s a pattern with your operating cash flow. Are there certain seasons or months when you produce more operating cash over others? Does it vary based on the day of the week or the time of day? Studying patterns via a cash flow analysis will arm your business with real, historical information you can use to prepare for later.
This information is valuable for creating a forecast of your operating cash flow. You can draw conclusions, form infographics, and chart business income and cash depletions. These can be broken down weekly, monthly or quarterly. Having this available at a glance can allow you to plan when it’s best to pay off expenses and when to cut spending. Similar to a sales forecast, use your cash flow forecast to make estimates and also consider outside events that could shift your predicted numbers.
Lease Your Equipment
Leasing equipment for a small monthly fee will help you maintain your cash savings. At first, it may seem counterintuitive to not own an asset. But unless you have an outstanding amount of cash at your disposal, owning will not be a viable option for everything.
In terms of maintaining a steady operating cash flow, leasing is known to be the safer option. Considering costs such as repairs, upkeep, maintenance, upgrade costs, and asset depreciation, owning large assets can become a huge hassle very quickly. While leasing, the payment value can be written off for tax purposes since it’s considered a business expense. Think about leasing your next equipment purchase.