Five ways to shorten your cash cycle

Key points in this article

  • Sending invoices immediately
  • Checking credit
  • Preventing credit card fraud

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.

Below are five intelligent ways of shortening your cash cycle to help you get paid sooner and to ultimately 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 cash flow cycle.

It’s important to invoice straight away and to consistency do so

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 ten days of an invoice date.

For example, a discount of around two per cent for payment within ten days could be an effective option that won’t 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.

Credit checks are a vital security measure for your business

4. Use shorter credit terms or stick to cash

Shortening your credit terms or removing the credit option altogether should only be considered 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 PIN numbers as an alternative to signing their cards. It’s unlikely that a person with a stolen card will also know the PIN number.
  • 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.

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.

Check signatures and ask for identity documents to help prevent credit card fraud

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