Cash is the lifeblood of a business, and without it business cannot survive. Generally, it takes three to six months for large and small businesses to get paid from its customers. In the meantime, business owners need money to pay your suppliers and employees.
Business owners can increase cashflow level by agreeing for longer credit terms with your suppliers or by arranging an overdraft with a bank. However, the returns on investment may not justify the high interest rates charged by banks. The same principle applies when considering finance companies as an alternative source of funding.
There are other ways which to help you manage cash flow that are simple and more cost effective:
Better invoicing by giving discounts to early payments
- Give discounts for early payments. If someone pays you in full at the beginning of a contract, it’s probably in their best interest to do so, as well. But if a client offers to pay half now and half later, you might give discounts to second payment if it is paid now.
- Give discounts for paying in advance. This is similar to the previous tip; however, instead of giving a discount for an immediate payment from your client, consider offering one upfront—in exchange for his or her commitment. This can include any combination of cash up front and/or all future payments made within 30 days of receiving invoices and statements from your company (businesses typically need at least 30 days after receiving an invoice before they can pay).
Negotiate for higher credit limit with suppliers
Once you have the necessary cash to cover your higher payments, request a credit limit increase from your suppliers. Tell them what you’re doing and show them your payment track record and ask them for higher credit limit.
There are some things that you can do as a business owner to make sure that you don’t strain your relationships with current suppliers. First, show them your payment record and your growth potential. Then, communicate clearly when you will pay your payables and how much you keep in credit in each payment.
Arrange a flexible tax payment scheme with IRD
- How to apply
Apply for the scheme by filling out an application form and submitting it by email or post to Inland Revenue. The process takes about one month, so you can apply as soon as you’re ready. If you are approved for the scheme, your payments will be adjusted accordingly and set at a fixed rate of either monthly, quarterly or half-yearly. You can also make additional payments at any time during the year if necessary.
Using tax pooling services
Tax pooling is a great way to manage your cashflow. By using this service, you can get access to a larger pool of cash and better interest rates for your money.
- Tax pooling works by using registered intermediaries for your provisional tax
- With tax pooling, you only make your provisional tax when it suits your cash flow.
- If you underpay your tax, registered intermediaries will automatically borrow tax payments from other payers in the pool to settle your tax. You would need to pay for interest on this but it would be much less than the late penalty payment and use of money interest charged by IRD.
- If you overpay your tax, you will earn premium interest when your overpaid tax payment is sitting in the tax pool. This overpaid tax payment will also be used to settle your future tax obligations.
Have an overdraft or flexi loan with banks
Having an overdraft or flexi loan with banks is a good way to get cash in your pocket, but it’s also a bad way to borrow money.
If you need some money on the side, overdrafts and flexi loans are there for you—but they might end up costing more than they save. Here’s how:
- Overdraft fees and interest rates can be high
- The payment terms of these loans may change without notice or consultation with you
Hopefully you now have a clear idea of how to improve your cashflow. We covered a few simple methods to boost your company’s bottom line over the long term, as well as some tips for dealing with unexpected financial emergencies in the short run. The best way forward is always going to be different for everyone, depending on their needs and situation, but we hope that these ideas can help get you started thinking about how best to manage your own cashflow.