Managing cash flow well can spell the difference between success and failure in business. Here are six misconceptions about cash flow that can hold small businesses back.
Myth #1 – Any customer is good for business
While it’s great to clock the sales and add another customer to your database, until they start paying, you’re working for free. For example, if you invoice a customer for £1,000 worth of services then spend months chasing payment from them, have you really earned £1,000? Is the true cost of acquiring and keeping this client reflected in your sales price? If you’re not convinced, take a close look at the oldest overdue debtors in your aged receivables report. That’s all cash locked away from your operating capital. Have these debtors been worth the time and effort it took to gain their business, deliver your service and chase payment? For perpetual late payers, you could add late-payment fees to your contracts or accept cash upfront.
Myth #2 – Discounting prices boosts business
As consumers, we all want a great deal. For businesses, while a discount can steer a herd of new customers through the door, those extra customers must compensate for the loss in profitability of each unit you sell — or your revenue may not actually improve. Also, do you have the time and resources to service your enlarged customer base? Have you driven down your price even though your strategy is to create (and sell) value? You may find yourself having to source cheaper (perhaps lower quality) parts or labour to maintain your lower price. Perpetually discounting can set a precedent in the market that drives down the value of your business.
Myth #3 – I can’t raise my prices
Business owners fear losing customers if they raise prices, so the decision to do so becomes a tough one. Price is a reflection of perceived value, so it’s okay to raise prices when your value has improved. And your customers will recognise that. For example, a company that services coffee machines might hike their prices after adding a pickup and delivery service. Because their customers are working long hours in the cafe, they’re likely to value a service that comes to their door, accept the price increase because it saves them precious time, and continue as a customer.
Myth #4 – I can raise my prices anytime I like
One of the quickest ways to lose customers is to increase your prices without explanation. It’s not audacious to increase your prices, but it is to raise prices significantly without warning. Timing matters, particularly if the increase is out of sync with the wider economy and competitors who offer similar value. So be clear about communicating the reason. Doing so demonstrates you view customers as valued stakeholders in your business and will maintain the trust you’ve worked so hard to build. Send an e-mail (or two) to your customers, alerting them to the date your prices will change. This is a good time to make your customers an offer to soften the price hike. For example, “Renew your yearly subscription and get a free half-hour consultation” or “Save money by paying for a year’s services upfront instead of monthly.”
Myth #5 – I don’t need an accountant or bookkeeper
You’ve invested in accounting software, so you don’t need a professional, right? Wrong. If you’re still spending a significant amount of your time inputting and extracting data, that’s time you’re not investing in other functions of the business. Your time is money, and managing your accounts can slow your day. Outsourcing to an accountant or bookkeeper, will save you time, particularly during the hectic end of financial year period. Plus, these professionals are up-to-date with the ins and outs of tax, reporting and payroll requirements. Their advisory role can help you steer your ship through the often murky waters of business finance.
Myth #6 – My payment terms are standard for every customer
Issuing the same credit terms to every new customer is a risk to your cash flow because some customers have a history of paying late or not paying at all. Instead of introducing the risk of bad debt into your business, do a credit check on customers and review their credit transaction history. Then you can apply payment terms that mitigate the risks to your cash flow, e.g., shorter payment times, lower credit limits, or cash on delivery. Unfortunately, too many businesses have lost money to non-paying customers and find themselves in a time-consuming and expensive exercise trying to recover the debt.
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